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 September 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 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 October 18, 2006: 31,717,736 shares.
EMCOR GROUP, INC. INDEX Page No. PART I - Financial Information Item 1. Financial Statements. Condensed Consolidated Balance Sheets - as of September 30, 2006 and December 31, 2005 1 Condensed Consolidated Statements of Operations - three months ended September 30, 2006 and 2005 3 Condensed Consolidated Statements of Operations - nine months ended September 30, 2006 and 2005 4 Condensed Consolidated Statements of Cash Flows - nine months ended September 30, 2006 and 2005 5 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income - nine months ended September 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. 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk. 28 Item 4. Controls and Procedures. 28 PART II - Other Information Item 1. Legal Proceedings. 29 Item 1A. Risk Factors. 29 Item 6. Exhibits. 30
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) - -------------------------------------------------------------------------------- September 30, December 31, 2006 2005 (Unaudited) - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 244,522 $ 103,785 Accounts receivable, net 1,110,934 1,046,380 Costs and estimated earnings in excess of billings on uncompleted contracts 163,060 185,634 Inventories 14,582 10,175 Prepaid expenses and other 37,673 43,829 ---------- ---------- Total current assets 1,570,771 1,389,803 Investments, notes and other long-term receivables 27,838 28,659 Property, plant and equipment, net 46,437 46,443 Goodwill 285,234 283,412 Identifiable intangible assets, net 16,111 16,990 Other assets 10,202 13,634 ---------- ---------- Total assets $1,956,593 $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) - -------------------------------------------------------------------------------- September 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 654 551 Accounts payable 461,676 452,709 Billings in excess of costs and estimated earnings on uncompleted contracts 411,710 330,235 Accrued payroll and benefits 144,503 154,276 Other accrued expenses and liabilities 108,455 107,545 ---------- ---------- Total current liabilities 1,126,998 1,045,316 Long-term debt and capital lease obligations 1,288 1,406 Other long-term obligations 143,008 116,783 ---------- ---------- Total liabilities 1,271,294 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, 33,583,432 and 33,266,154 shares issued, respectively 336 333 Capital surplus 341,603 325,232 Accumulated other comprehensive income (loss) 1,175 (5,370) Retained earnings 359,597 313,170 Treasury stock, at cost, 1,891,696 and 2,162,388 shares, respectively (17,412) (17,929) ---------- ---------- Total stockholders' equity 685,299 615,436 ---------- ---------- Total liabilities and stockholders' equity $1,956,593 $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 September 30, 2006 2005 - -------------------------------------------------------------------------------- Revenues $1,269,634 $1,210,354 Cost of sales 1,121,762 1,079,271 ---------- ---------- Gross profit 147,872 131,083 Selling, general and administrative expenses 110,714 101,521 Restructuring expenses 604 256 ---------- ---------- Operating income 36,554 29,306 Interest expense (361) (2,049) Interest income 1,824 691 Minority interest (1,699) (1,514) ---------- ---------- Income from continuing operations before income taxes 36,318 26,434 Income tax provision (benefit) 13,765 (5,580) ---------- ---------- Income from continuing operations 22,553 32,014 Loss from discontinued operations, net of income taxes - (1,150) ---------- ---------- Net income $ 22,553 $ 30,864 ========== ========== Net income (loss) per common share - Basic From continuing operations $ 0.71 $ 1.02 From discontinued operations - (0.03) ---------- ---------- $ 0.71 $ 0.99 ========== ========== Net income (loss) per common share - Diluted From continuing operations $ 0.69 $ 1.00 From discontinued operations - (0.03) ---------- ---------- $ 0.69 $ 0.97 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)(Unaudited) - -------------------------------------------------------------------------------- Nine months ended September 30, 2006 2005 - -------------------------------------------------------------------------------- Revenues $3,641,132 $3,462,941 Cost of sales 3,244,902 3,120,685 ---------- ---------- Gross profit 396,230 342,256 Selling, general and administrative expenses 321,411 290,823 Restructuring expenses 604 1,727 ---------- ---------- Operating income 74,215 49,706 Interest expense (1,701) (6,614) Interest income 3,894 1,979 Minority interest (2,628) (3,366) ---------- ---------- Income from continuing operations before income taxes 73,780 41,705 Income tax provision 26,733 18 ---------- ---------- Income from continuing operations 47,047 41,687 Loss from discontinued operations, net of income taxes (620) (977) ---------- ---------- Net income $ 46,427 $ 40,710 ========== ========== Net income (loss) per common share - Basic From continuing operations $ 1.49 $ 1.34 From discontinued operations (0.02) (0.03) ---------- ---------- $ 1.47 $ 1.31 ========== ========== Net income (loss) per common share - Diluted From continuing operations $ 1.44 $ 1.31 From discontinued operations (0.02) (0.03) ---------- ---------- $ 1.42 $ 1.28 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)(Unaudited) - --------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 2006 2005 - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash flows from operating activities: Net income $ 46,427 $ 40,710 Depreciation and amortization 12,866 13,377 Amortization of identifiable intangibles 2,326 2,407 Minority interest 2,628 3,366 Deferred income taxes 8,635 (4,247) Loss on sale of discontinued operations, net of income taxes 620 1,110 Excess tax benefits from share-based compensation (2,928) - Equity income from unconsolidated entities (3,880) (3,868) Other non-cash items 7,568 4,560 Distributions from unconsolidated entities 6,314 469 Changes in operating assets and liabilities 68,170 35,391 --------- --------- Net cash provided by operating activities 148,746 93,275 --------- --------- Cash flows from investing activities: Payments for acquisition of a business and earn-out agreements (5,436) (673) Proceeds from sale of discontinued operations and sale of assets 1,262 3,038 Proceeds from sale of property, plant and equipment 313 905 Purchase of property, plant and equipment (13,171) (8,180) Investment in and advances to unconsolidated entities and joint ventures (3,530) (2,075) Net proceeds (disbursements) related to other investments 1,916 (947) --------- --------- Net cash used in investing activities (18,646) (7,932) --------- --------- Cash flows from financing activities: Proceeds from working capital credit line 149,500 663,800 Repayments of working capital credit line (149,500) (743,800) Net repayments for long-term debt (40) (76) Repayments for capital lease obligations (139) (81) Proceeds from exercise of stock options 7,888 3,704 Excess tax benefits from share-based compensation 2,928 - --------- --------- Net cash provided by (used in) financing activities 10,637 (76,453) --------- --------- Increase in cash and cash equivalents 140,737 8,890 Cash and cash equivalents at beginning of year 103,785 59,109 --------- --------- Cash and cash equivalents at end of period $ 244,522 $ 67,999 ========= ========= Supplemental cash flow information: Cash paid for: Interest $ 1,317 $ 4,974 Income taxes $ 20,336 $ 5,219 Non-cash financing activities: Assets acquired under capital lease obligations $ 163 $ 178 Note receivable from sale of subsidiary $ 246 $ 1,375 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)(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 40,710 - - - 40,710 - $40,710 Foreign currency translation adjustments (530) - - (530) - - (530) ------- Comprehensive income $40,180 ======= 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) 3,704 6 4,589 - - (891) Value of restricted stock units (2) 1,358 - 1,358 - - - -------- ---- -------- ------- -------- -------- Balance, September 30, 2005 $606,732 $332 $323,366 $ 7,169 $293,838 $(17,973) ======== ==== ======== ======= ======== ======== Balance, January 1, 2006 $615,436 $333 $325,232 $(5,370) $313,170 $(17,929) Net income 46,427 - - - 46,427 - $46,427 Foreign currency translation adjustments 6,545 - - 6,545 - - 6,545 ------- Comprehensive income $52,972 ======= 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) 12,041 3 10,485 - - 1,553 Value of issued restricted stock units 1,489 - 1,489 - - - Share-based compensation expense 4,948 - 4,948 - - - -------- ---- -------- ------- -------- -------- Balance, September 30, 2006 $685,299 $336 $341,603 $ 1,175 $359,597 $(17,412) ======== ==== ======== ======= ======== ======== </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 Cosolidated Finanacial 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 accompanying notes 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 nine month periods ended September 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 January 2006 and September 2005. 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 nine months ended September 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. Included in the results of discontinued operations for the three and nine months ended September 30, 2005 is a loss of $1.0 million (net of income taxes) by reason of the September 2005 sale of a subsidiary that had been part of our United States 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. As of September 30, 2006, the notes had been paid in full. 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 nine month periods ended September 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 September 30, ------------------------------- 2006 2005 ---- ---- Numerator: <S> <C> <C> Income before discontinued operations $22,553,000 $32,014,000 Loss from discontinued operations - (1,150,000) ----------- ----------- Net income available to common stockholders $22,553,000 $30,864,000 =========== =========== Denominator: Weighted average shares outstanding used to compute basic earnings per share 31,701,882 31,325,170 Effect of diluted securities 1,189,627 652,024 ----------- ----------- Shares used to compute diluted earnings per share 32,891,509 31,977,194 =========== =========== Basic earnings (loss) per share: Continuing operations $ 0.71 $ 1.02 Discontinued operations - (0.03) ----------- ----------- Total $ 0.71 $ 0.99 =========== =========== Diluted earnings (loss) per share: Continuing operations $ 0.69 $ 1.00 Discontinued operations - (0.03) ----------- ----------- Total $ 0.69 $ 0.97 =========== =========== </TABLE> <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------- 2006 2005 ---- ---- Numerator: <S> <C> <C> Income before discontinued operations $47,047,000 $41,687,000 Loss from discontinued operations (620,000) (977,000) ----------- ----------- Net income available to common stockholders $46,427,000 $40,710,000 =========== =========== Denominator: Weighted average shares outstanding used to compute basic earnings per share 31,529,641 31,107,896 Effect of diluted securities 1,096,403 613,336 ----------- ----------- Shares used to compute diluted earnings per share 32,626,044 31,721,232 =========== =========== Basic earnings (loss) per share: Continuing operations $ 1.49 $ 1.34 Discontinued operations (0.02) (0.03) ----------- ----------- Total $ 1.47 $ 1.31 =========== =========== Diluted earnings (loss) per share: Continuing operations $ 1.44 $ 1.31 Discontinued operations (0.02) (0.03) ----------- ----------- Total $ 1.42 $ 1.28 =========== =========== </TABLE>
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE C Earnings Per Share - (continued) There were no anti-dilutive stock options that were required to be excluded from the calculation of diluted EPS for the three and nine month periods ended September 30, 2006, respectively. There were 365,940 and 498,806 anti-dilutive stock options that were required to be excluded from the calculation of diluted EPS for the three and nine month periods ended September 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 and Personnel Committee of our Board of Directors. Note I - Stock Options and Stock Plans of the Notes to the Consolidated Financial Statements contained in our 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 $0.6 million and $3.6 million of compensation expense in the three and nine months ended September 30, 2006, respectively. As a result, net income was adversely impacted in these periods by $0.4 million and $2.1 million and diluted earnings per share ("Diluted EPS") was adversely impacted by $0.01 and $0.06, respectively. Approximately $1.5 million of compensation expense, net of income taxes, will be recognized over the approximately 18 month remaining vesting period for stock options outstanding at September 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 nine months ended September 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 nine month periods ended September 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 nine months ended months ended Sept. 30, Sept. 30, 2005 2005 ------------- ------------ Income from continuing operations: As reported $32,014 $41,687 Less: Total stock-based compensation expense determined under fair value based method, net of related tax effects 433 1,662 ------- ------- Pro Forma $31,581 $40,025 ======= ======= Basic EPS: As reported $ 1.02 $ 1.34 Pro Forma $ 1.01 $ 1.29 Diluted EPS: As reported $ 1.00 $ 1.31 Pro Forma $ 0.99 $ 1.26
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 (there were no stock options granted during the three months ended September 30, 2006 and 2005): For the nine months ended Sept. 30, ----------------------------------- 2006 2005 ---- ---- Dividend yield 0% 0% Expected volatility 35.0% 36.7% Risk-free interest rate 5.0% 3.9% Expected life of options in years 6.36 6.33 Weighted average grant date fair value $20.33 $ 8.17 Fofeitures of stock options have been historically immaterial to the calculation and are estimated to be zero in both periods presented. As of December 31, 2005, there were 3,648,728 stock options outstanding. For the three months ended September 30, 2006, no stock options were granted, 146,534 stock options were exercised (average exercise price of $16.70 per share), and no stock options expired or were forfeited. For the nine months ended September 30, 2006, 79,062 stock options were granted (average exercise price of $41.37 per share), 525,872 stock options were exercised (average exercise price of $15.27 per share), and no stock options expired or were forfeited. At September 30, 2006, 3,201,918 options were outstanding at an average exercise price of $20.23 per share with a remaining contractual life of 5.6 years, and 2,628,027 options were exercisable at an average exercise price of $19.75 per share which options had a remaining contractual life of 5.1 years. As a result of stock option exercises, $7.9 million of proceeds were received during the nine months ended September 30, 2006. The income tax benefit derived as a result of such exercises and share-based compensation was $4.5 million, of which $2.9 million represented excess tax benefits. This compares to $3.7 million of proceeds from stock option exercises for the nine months ended September 30, 2005, on which the income tax benefit from stock option exercises was $2.9 million. Additionally, zero and 136,997 restricted share units were awarded during the three and nine months ended September 30, 2006 pursuant to non-employee director and key-person long term incentive plans and a separation agreement, for which $0.5 million and $1.5 million of compensation expense was recognized during the three and nine months ended September 30, 2006, respectively. We also have outstanding phantom equity units for which $1.2 million and $2.4 million of expense was recognized for the three and nine months ended September 30, 2006, respectively, due to changes in the market price of our common stock from the award date. Common Stock As of September 30, 2006 and December 31, 2005, 31,691,736 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 Sept. 30, ------------------------------------ 2006 2005 ---- ---- Revenues from unrelated entities: <S> <C> <C> United States electrical construction and facilities services $ 312,864 $ 306,413 United States mechanical construction and facilities services 471,597 428,648 United States facilities services 244,489 199,602 ---------- ---------- Total United States operations 1,028,950 934,663 Canada construction and facilities services 66,724 110,418 United Kingdom construction and facilities services 173,960 165,273 Other international construction and facilities services - - ---------- ---------- Total worldwide operations $1,269,634 $1,210,354 ========== ========== </TABLE> <TABLE> <CAPTION> For the three months ended Sept. 30, ------------------------------------ 2006 2005 ---- ---- Total revenues: <S> <C> <C> United States electrical construction and facilities services $ 314,190 $ 309,242 United States mechanical construction and facilities services 474,836 430,362 United States facilities services 246,422 199,656 Less intersegment revenues (6,498) (4,597) ---------- ---------- Total United States operations 1,028,950 934,663 Canada construction and facilities services 66,724 110,418 United Kingdom construction and facilities services 173,960 165,273 Other international construction and facilities services - - ---------- ---------- Total worldwide operations $1,269,634 $1,210,354 ========== ========== </TABLE>
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE E Segment Information - (continued) <TABLE> <CAPTION> For the nine months ended Sept. 30, ----------------------------------- 2006 2005 ---- ---- Revenues from unrelated entities: <S> <C> <C> United States electrical construction and facilities services $ 930,582 $ 882,422 United States mechanical construction and facilities services 1,270,670 1,245,781 United States facilities services 695,199 570,805 ---------- ---------- Total United States operations 2,896,451 2,699,008 Canada construction and facilities services 230,962 260,893 United Kingdom construction and facilities services 513,719 503,040 Other international construction and facilities services - - ---------- ---------- Total worldwide operations $3,641,132 $3,462,941 ========== ========== </TABLE> <TABLE> <CAPTION> For the nine months ended Sept. 30, ----------------------------------- 2006 2005 ---- ---- Total revenues: <S> <C> <C> United States electrical construction and facilities services $ 934,581 $ 892,758 United States mechanical construction and facilities services 1,280,928 1,251,029 United States facilities services 699,292 572,211 Less intersegment revenues (18,350) (16,990) ---------- ---------- Total United States operations 2,896,451 2,699,008 Canada construction and facilities services 230,962 260,893 United Kingdom construction and facilities services 513,719 503,040 Other international construction and facilities services - - ---------- ---------- Total worldwide operations $3,641,132 $3,462,941 ========== ========== </TABLE> <TABLE> <CAPTION> For the three months ended Sept. 30, ------------------------------------ 2006 2005 ---- ---- Operating income (loss): <S> <C> <C> United States electrical construction and facilities services $ 11,577 $ 21,335 United States mechanical construction and facilities services 21,819 11,222 United States facilities services 14,548 8,146 -------- -------- Total United States operations 47,944 40,703 Canada construction and facilities services 176 (3,020) United Kingdom construction and facilities services 1,344 2,725 Other international construction and facilities services (297) 24 Corporate administration (12,009) (10,870) Restructuring expenses (604) (256) -------- -------- Total worldwide operations 36,554 29,306 Other corporate items: Interest expense (361) (2,049) Interest income 1,824 691 Minority interest (1,699) (1,514) -------- -------- Income from continuing operations before income taxes $ 36,318 $ 26,434 ======== ======== </TABLE>
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE E Segment Information - (continued) <TABLE> <CAPTION> For the nine months ended Sept. 30, ----------------------------------- 2006 2005 ---- ---- Operating income (loss): <S> <C> <C> United States electrical construction and facilities services $ 31,016 $ 49,383 United States mechanical construction and facilities services 40,253 12,117 United States facilities services 29,275 20,739 -------- -------- Total United States operations 100,544 82,239 Canada construction and facilities services 3,256 (5,272) United Kingdom construction and facilities services 6,907 4,617 Other international construction and facilities services 254 (14) Corporate administration (36,142) (30,137) Restructuring expenses (604) (1,727) -------- -------- Total worldwide operations 74,215 49,706 Other corporate items: Interest expense (1,701) (6,614) Interest income 3,894 1,979 Minority interest (2,628) (3,366) -------- -------- Income from continuing operations before income taxes $ 73,780 $ 41,705 ======== ======== </TABLE> <TABLE> <CAPTION> Sept. 30, December 31, 2006 2005 ---------- ------------ Total assets: <S> <C> <C> United States electrical construction and facilities services $ 356,851 $ 357,368 United States mechanical construction and facilities services 686,727 673,315 United States facilities services 362,313 331,495 ---------- ---------- Total United States operations 1,405,891 1,362,178 Canada construction and facilities services 83,315 137,241 United Kingdom construction and facilities services 268,138 154,633 Other international construction and facilities services 702 3,008 Corporate administration 198,547 121,881 ---------- ---------- Total worldwide operations $1,956,593 $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 nine months ended September 30, 2006 and 2005 were as follows (in thousands): <TABLE> <CAPTION> For the three months ended Sept. 30, For the nine months ended Sept. 30, ------------------------------------ ----------------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- <S> <C> <C> <C> <C> Service cost $ 1,089 $ 875 $ 3,169 $ 2,880 Interest cost 2,667 2,386 7,758 7,365 Expected return on plan assets (2,843) (2,432) (8,270) (7,508) Net amortization of prior service cost and actuarial loss 19 21 55 66 Amortization of unrecognized loss 426 332 1,238 1,025 ------- ------- ------- ------- Net periodic pension benefit cost $ 1,358 $ 1,182 $ 3,950 $ 3,828 ======= ======= ======= ======= </TABLE> Employer Contributions For the nine months ended September 30, 2006, EMCOR's United Kingdom subsidiary contributed $4.8 million to its defined benefit pension plan and anticipates contributing an additional $1.7 million to the plan during the remainder of 2006. NOTE G Income Taxes For the three months ended September 30, 2006, the income tax provision was $13.8 million compared to a $5.6 million income tax benefit for the three months ended September 30, 2005. For the nine months ended September 30, 2006 and 2005, the income tax provision was $26.7 million and $0.02 million, respectively. The estimated effective income tax rate was 38% for the three and nine months ended September 30, 2006 before an adjustment which relates to the deductibility of certain compensation arrangements for income tax purposes for the nine month period. The effective income tax rate was 45% and 42% for the three and nine months ended September 30, 2005, respectively. The income tax (benefit) provision for the three and nine months ended September 30, 2005 includes a net favorable income tax adjustment of $17.5 million attributable to $22.7 million of income tax reserves no longer required, offset by a $5.2 million valuation allowance recorded to reduce net deferred tax assets. NOTE H Legal Proceedings See Part II - Other Information, Item 1. - Legal Proceedings. NOTE I New Accounting Pronouncements In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109, "Accounting for Income Taxes" ("FIN 48"), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 as of January 1, 2007, as required. We have not determined the effect, if any, the adoption of FIN 48 will have on our financial position and results of operations. In September 2006, the FASB issued Statement No. 157 "Fair Value Measurements" ("Statement 157"). Statement 157 provides guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new
circumstances. Statement 157 is effective for financial statements commencing with our 2008 first quarter. Early adoption is permitted. We have not determined the effect, if any, the adoption of Statement 157 will have on our financial position and results of operations. In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("Statement 158"). Statement 158 requires that a company recognize the overfunded or underfunded status of its defined benefit post retirement plans (other than multiemployer plans) as an asset or liability in its statement of financial position and that it recognize changes in the funded status in the year in which the changes occur through other comprehensive income. Statement 158 also requires the measurement of defined benefit plan assets and obligations as of the fiscal year end, in addition to footnote disclosures. As our common stock is a publicly traded equity security, we are required to recognize the funded status of defined benefit pension plans (we do not have other post retirement benefit plans) and to provide the required footnote disclosures, as of the end of this fiscal year ending December 31, 2006. We have not determined the effect the adoption of Statement 158 will have on our financial position. Note J Subsequent Event On October 5, 2006, we acquired all the capital stock of S. A. Comunale Co., Inc. ("Comunale") for a purchase price of approximately $36.0 million in cash. Comunale is an Ohio based fire protection and mechanical services company which offers design, installation and maintenance services for fire detection, protection and suppression systems as well as mechanical construction services for HVAC, plumbing, process piping and design build applications.
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 third quarter of 2006 were $1.27 billion compared to $1.21 billion for the third quarter of 2005. Our net income was $22.6 million for the third quarter of 2006 compared to $30.9 million for the third quarter of 2005. Diluted earnings per share were $0.69 per share for the third quarter compared to $0.97 per share for the third quarter of 2005. Included in the net income and diluted earnings per share for the third quarter of 2005 were net favorable income tax adjustments of $17.5 million or $0.55 per diluted share. Our revenues for the nine months ended September 30, 2006 were $3.64 billion compared to $3.46 billion for the nine months ended September 30, 2005. Our net income was $46.4 million for the nine months ended September 30, 2006 compared to $40.7 million for the nine months ended September 30, 2005. Diluted earnings per share were $1.42 per share for the nine months ended September 30, 2006 compared to $1.28 per share for the nine months ended September 30, 2005. Included in the net income and diluted earnings per share for the nine months ended September 30, 2005 were net favorable income tax adjustments of $17.5 million or $0.55 per diluted share. Our revenues increased in the three and nine months ended September 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 nine months ended September 30, 2006 compared to the three and nine months ended September 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 nine month results were positively impacted by the absence of an $11.7 million non-cash expense recorded in 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. Also contributing to the improvement in net income were $2.8 million and $6.8 million of increases in net interest income for the three and nine months ended September 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 our working capital credit line. Negatively impacting our 2006 nine month results, when compared to the prior year's nine month results, were the absences 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) and favorable income tax adjustments of $17.5 million in the third quarter of 2005. Selling, general and administrative expenses were higher in the three and nine months ended September 30, 2006, compared to the same periods of 2005, primarily due to an increase in incentive-based compensation expense as a result of improved operating results in addition to $0.6 million and $3.6 million of expense related to the impact of the adoption of Statement No. 123 (R) "Share-Based Payment" ("Statement 123 (R)") issued by the Financial Accounting Standards Board ("FASB") for the three and nine months ended September 30, 2006, respectively. Selling, general and administrative expenses also increased by $2.4 million and $4.5 million for the three and nine months ended September 30, 2006 compared to the prior year comparable periods due to other compensation expense primarily related to deferred compensation plans for which the liabilities fluctuate with changes in the market price of our common stock. In January 2006 and September 2005, we sold a subsidiary that had been part of our United States mechanical construction and facilities services segment and a subsidiary that had been part of our United States facilities services segment, respectively. Consequently, results of operations for all periods presented reflect discontinued operations accounting. Our results of operations for the nine months ended September 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. Our results of operations for the nine months ended September 30, 2005 reflect a loss of $1.0 million (net of income taxes) by reason of the September 2005 sale of the subsidiary that had been part of our United States facilities services segment.
We have stock-based compensation plans and programs. 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 $0.6 million and $3.6 million of compensation expense in the three and nine months ended September 30, 2006, respectively. As a result, net income was adversely impacted in these periods by $0.4 million and $2.1 million, respectively, and diluted earnings per share was adversely impacted by $0.01 and $0.06, respectively. Approximately $1.5 million of compensation expense, net of income taxes, will be recognized over the approximately 18 month remaining vesting period for stock options outstanding at September 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 nine months ended September 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 Sept. 30, ----------------------------------------------------- % of % of 2006 Total 2005 Total --------------------- --------------------- Revenues: <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 312,864 25% $ 306,413 25% United States mechanical construction and facilities services 471,597 37% 428,648 35% United States facilities services 244,489 19% 199,602 16% ---------- ---------- Total United States operations 1,028,950 81% 934,663 77% Canada construction and facilities services 66,724 5% 110,418 9% United Kingdom construction and facilities services 173,960 14% 165,273 14% Other international construction and facilities services - - ---------- ---------- Total worldwide operations $1,269,634 $1,210,354 ========== ========== </TABLE>
<TABLE> <CAPTION> For the nine months ended Sept. 30, ----------------------------------------------------- % of % of 2006 Total 2005 Total --------------------- --------------------- Revenues: <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 930,582 26% $ 882,422 25% United States mechanical construction and facilities services 1,270,670 35% 1,245,781 36% United States facilities services 695,199 19% 570,805 16% ---------- ---------- Total United States operations 2,896,451 80% 2,699,008 78% Canada construction and facilities services 230,962 6% 260,893 8% United Kingdom construction and facilities services 513,719 14% 503,040 15% Other international construction and facilities services - - ---------- ---------- Total worldwide operations $3,641,132 $3,462,941 ========== ========== </TABLE> Our revenues for the third quarter of 2006 were $1.27 billion compared to $1.21 billion for the third quarter of 2005. Our net income was $22.6 million for the third quarter of 2006 compared to $30.9 million for the third quarter of 2005. Diluted earnings per share were $0.69 per share for the third quarter compared to $0.97 per share for the third quarter of 2005. Included in the net income and diluted earnings per share for the third quarter of 2005 were net favorable income tax adjustments of $17.5 million or $0.55 per diluted share. Our revenues for the nine months ended September 30, 2006 were $3.64 billion compared to $3.46 billion for the nine months ended September 30, 2005. Our net income was $46.4 million for the nine months ended September 30, 2006 compared to $40.7 million for the nine months ended September 30, 2005. Diluted earnings per share were $1.42 per share for the nine months ended September 30, 2006 compared to $1.28 per share for the nine months ended September 30, 2005. Included in the net income and diluted earnings per share for the nine months ended September 30, 2005 were net favorable income tax adjustments of $17.5 million or $0.55 per diluted share. Our contract backlog at September 30, 2006 was $3.40 billion compared to $2.75 billion at September 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, government and hospitality 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 nine months ended September 30, 2006 increased $6.5 million and $48.2 million compared to the three and nine months ended September 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 nine months ended September 30, 2006 increased $42.9 million and $24.9 million compared to the three and nine months ended September 30, 2005, respectively. The revenues increases were primarily attributable to increased commercial and hospitality work. Our United States facilities services revenues, which include those operations that principally provide maintenance and consulting services, increased $44.9 million and $124.4 million for the three and nine months ended September 30, 2006 compared to the three and nine months ended September 30, 2005, respectively. These increases in revenues were primarily attributable to site-based government related work and to mobile services offered by this segment, including revenues from a mobile services company acquired in November 2005. Revenues of our Canada construction and facilities services decreased by $43.7 million and $29.9 million for the three and nine months ended September 30, 2006 compared to the same periods in 2005, respectively. The revenues decreases primarily reflected a decrease in oil and gas work, partially offset by increases of $4.5 million and $17.1 million for the three and nine 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.
Our United Kingdom construction and facilities services revenues increased $8.7 million and $10.7 million for the three and nine months ended September 30, 2006 compared to the same periods in 2005, respectively, primarily due to increased work on rail projects in both periods, and commercial construction in the nine month period. The increases were impacted by an increase of $8.5 million for the three month period due to a strengthening of the British pound rate of exchange to the United States dollar and a decrease of $5.0 million for the nine month period, 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 Sept. 30, For the nine months ended Sept. 30, ------------------------------------ ----------------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- <S> <C> <C> <C> <C> Cost of sales $ 1,121,762 $ 1,079,271 $ 3,244,902 $ 3,120,685 Gross profit 147,872 131,083 396,230 342,256 Gross profit, as a percentage of revenues 11.6% 10.8% 10.9% 9.9% </TABLE> Our gross profit (revenues less cost of sales) increased $16.8 million and $54.0 million for the three and nine months ended September 30, 2006, respectively, compared to the same periods in 2005. Gross profit as a percentage of revenues was 11.6% and 10.9% for the three and nine months ended September 30, 2006, respectively, compared to 10.8% and 9.9% for the three and nine months ended September 30, 2005, respectively. The increase in gross profit for the three and nine months ended September 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 nine months ended September 30, 2006 were positively impacted by the absence of an $11.7 million non-cash expense recorded in 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 nine month results when compared to the same period in the prior year 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 Sept. 30, For the nine months ended Sept. 30, ------------------------------------ ----------------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- <S> <C> <C> <C> <C> Selling, general and administrative expenses $ 110,714 $ 101,521 $ 321,411 $ 290,823 Selling, general and administrative expenses, as a percentage of revenues 8.7% 8.4% 8.8% 8.4% </TABLE> Our selling, general and administrative expenses for the three months ended September 30, 2006 increased by $9.2 million to $110.7 million compared to $101.5 million for the three months ended September 30, 2005. Selling, general and administrative expenses as a percentage of revenues were 8.7% for the three months ended September 30, 2006 compared to 8.4% for the three months ended September 30, 2005. Our selling, general and administrative expenses for the nine months ended September 30, 2006 increased by $30.6 million to $321.4 million when compared to $290.8 million for the nine months ended September 30, 2005. Selling, general and administrative expenses as a percentage of revenues were 8.8% for the nine months ended September 30, 2006 compared to 8.4% for the nine months ended September 30, 2005. For the three and nine month periods ended September 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 $0.6 million and $3.6 million for the three and nine months ended September 30, 2006, respectively, as a result of the adoption of Statement 123(R) on January 1, 2006. Additionally, there was a $2.4 million and $4.5 million increase in other incentive-based compensation expense for the three and nine months ended September 30, 2006, respectively, due to other compensation expense primarily related to deferred compensation plans for which the liabilities fluctuate with changes in the market price of our common stock.
Restructuring expenses Restructuring expenses, primarily relating to employee severance obligations, were $0.6 million for the three and nine months ended September 30, 2006 and $0.3 million and $1.7 million for the three and nine months ended September 30, 2005, respectively. As of September 30, 2006, there were $0.1 million of 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 Sept. 30, ----------------------------------------------------- % of % of Segment Segment 2006 Revenues 2005 Revenues ---- -------- ---- -------- Operating income (loss): <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 11,577 3.7% $ 21,335 7.0% United States mechanical construction and facilities services 21,819 4.6% 11,222 2.6% United States facilities services 14,548 6.0% 8,146 4.1% -------- -------- Total United States operations 47,944 4.7% 40,703 4.4% Canada construction and facilities services 176 0.3% (3,020) (2.7)% United Kingdom construction and facilities services 1,344 0.8% 2,725 1.6% Other international construction and facilities services (297) 24 Corporate administration (12,009) (10,870) Restructuring expenses (604) (256) -------- -------- Total worldwide operations 36,554 2.9% 29,306 2.4% Other corporate items: Interest expense (361) (2,049) Interest income 1,824 691 Minority interest (1,699) (1,514) -------- -------- Income from continuing operations before income taxes $ 36,318 $ 26,434 ======== ======== </TABLE>
<TABLE> <CAPTION> For the nine months ended Sept. 30, ----------------------------------------------------- % of % of Segment Segment 2006 Revenues 2005 Revenues ---- -------- ---- -------- Operating income (loss): <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 31,016 3.3% $ 49,383 5.6% United States mechanical construction and facilities services 40,253 3.2% 12,117 1.0% United States facilities services 29,275 4.2% 20,739 3.6% -------- -------- Total United States operations 100,544 3.5% 82,239 3.0% Canada construction and facilities services 3,256 1.4% (5,272) (2.0)% United Kingdom construction and facilities services 6,907 1.3% 4,617 0.9% Other international construction and facilities services 254 (14) Corporate administration (36,142) (30,137) Restructuring expenses (604) (1,727) -------- -------- Total worldwide operations 74,215 2.0% 49,706 1.4% Other corporate items: Interest expense (1,701) (6,614) Interest income 3,894 1,979 Minority interest (2,628) (3,366) -------- -------- Income from continuing operations before income taxes $ 73,780 $ 41,705 ======== ======== </TABLE> As described below in more detail, our operating income increased by $7.2 million for the three months ended September 30, 2006 to $36.6 million compared to operating income of $29.3 million for the three months ended September 30, 2005. Our operating income increased by $24.5 million for the nine months ended September 30, 2006 to $74.2 million compared to operating income of $49.7 million for the nine months ended September 30, 2005. Our United States electrical construction and facilities services operating income of $11.6 million for the three months ended September 30, 2006 decreased $9.8 million compared to operating income of $21.3 million for the three months ended September 30, 2005. Operating income of $31.0 million for the nine months ended September 30, 2006 decreased $18.4 million compared to operating income of $49.4 million for the nine months ended September 30, 2005. The decrease in operating income for the three and nine months ended September 30, 2006 was primarily the result of reduced transportation infrastructure and financial services projects, which produced higher operating margins in the 2005 periods and write-downs of certain contracts in 2006. Absent from the nine months ended September 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 nine month periods. Our United States mechanical construction and facilities services operating income of $21.8 million for the three months ended September 30, 2006 increased $10.6 million compared to operating income of $11.2 million for the three months ended September 30, 2005. Operating income of $40.3 million for the nine months ended September 30, 2006 increased $28.1 million compared to operating income of $12.1 million for the nine months ended September 30, 2005. This segment primarily benefited from increased operating income from hospitality, high-tech and food and pharmaceutical process work. 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 nine month periods. The operating income for the nine months ended September 30, 2005 reflects an approximately $11.7 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 September 30, 2006 was $14.5 million compared to operating income of $8.1 million for the three months ended September 30, 2005. Operating income for the nine months ended September 30, 2006 was $29.3 million compared to operating income of $20.7 million for the nine months ended September 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. In addition, for the three months ended September 30, 2006, operating income also benefited from increased site-based government work.
Our Canada construction and facilities services operating income was $0.2 million for the three months ended September 30, 2006 compared to an operating loss of $3.0 million for the three months ended September 30, 2005. Operating income was $3.3 million for the nine months ended September 30, 2006 compared to an operating loss of $5.3 million for the nine months ended September 30, 2005. The improvements in operating income were primarily attributable to improved hospital, mining and auto manufacturing construction contract performance. Our United Kingdom construction and facilities services operating income for the three months ended September 30, 2006 was $1.3 million compared to operating income of $2.7 million for the three months ended September 30, 2005. Operating income for the nine months ended September 30, 2006 was $6.9 million compared to operating income of $4.6 million for the nine months ended September 30, 2005. The decrease in operating income for the three month period was primarily due to decreased income on rail projects due to lower achievable gross profit than in the prior period. The increase in the nine month period operating income was primarily attributable to facilities services work, partially offset by decreased income on rail projects. Other international construction and facilities services operating loss was $0.3 million for the three months ended September 30, 2006 compared to operating income of $0.02 million for the three months ended September 30, 2005. Operating income was $0.3 million for the nine months ended September 30, 2006 compared to operating losses of $0.01 million for the nine months ended September 30, 2005. Corporate administration expenses for the three months ended September 30, 2006 were $12.0 million compared to $10.9 million for the three months ended September 30, 2005. Corporate administration expenses for the nine months ended September 30, 2006 were $36.1 million compared to $30.1 million for the nine months ended September 30, 2005. The increase in expenses was primarily due to $0.6 million and $3.6 million of expenses related to the adoption of Statement 123(R) for the three and nine month periods ended September 30, 2006, respectively, and increases in incentive-based compensation of $1.1 million and $2.0 million for the three and nine months ended September 30, 2006, respectively, compared to the same periods in 2005 due to other compensation expense primarily related to deferred compensation plans for which the liabilities fluctuate with changes in the market price of our common stock. Restructuring expenses, primarily relating to employee severance obligations, were $0.6 million for the three and nine months ended September 30, 2006 and $0.3 million and $1.7 million for the three and nine months ended September 30, 2005, respectively. Non-operating items Interest expense for the three months ended September 30, 2006 and 2005 was $0.4 million and $2.0 million, respectively. Interest expense for the nine months ended September 30, 2006 and 2005 was $1.7 million and $6.6 million, respectively. The decrease in interest expense was primarily due to the reduction in borrowing levels during the three and nine months ended September 30, 2006 compared to the borrowing levels in the three and nine months ended September 30, 2005. Interest income for the three months ended September 30, 2006 was $1.8 million compared to $0.7 million for the three months ended September 30, 2005. Interest income for the nine months ended September 30, 2006 was $3.9 million compared to $2.0 million for the nine months ended September 30, 2005. The increases in interest income were primarily related to increases in cash available for investment. Minority interest represents the allocation of earnings to those of our joint venture partners who have a minority-ownership interest in joint ventures to which we are a party and which joint ventures have been consolidated. For the three months ended September 30, 2006, the income tax provision was $13.8 million compared to a $5.6 million income tax benefit for the three months ended September 30, 2005. For the nine months ended September 30, 2006 and 2005, the income tax provision was $26.7 million and $0.02 million, respectively. The estimated effective income tax rate was 38% for the three and nine months ended September 30, 2006 before an adjustment which relates to the deductibility of certain compensation arrangements for income tax purposes for the nine month period. The effective income tax rate was 45% and 42% for the three and nine months ended September 30, 2005, respectively. The income tax (benefit) provision for the three and nine months ended September 30, 2005 includes a net favorable income tax adjustment of $17.5 million.
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 nine months ended Sept. 30, ------------------------- 2006 2005 ---- ---- Net cash provided by operating activities $148,746 $ 93,275 Net cash used in investing activities $(18,646) $ (7,932) Net cash provided by (used in) financing activities $ 10,637 $(76,453) Our consolidated cash balance increased by approximately $140.7 to $244.5 million at September 30, 2006 from $103.8 million at December 31, 2005. The increase in net cash provided by operating activities for the nine months ended September 30, 2006 compared to the nine months ended September 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 $18.6 million for the nine months ended September 30, 2006 increased $10.7 million compared to $7.9 million for the same period in the prior year primarily due to an increase in the purchase of property, plant and equipment of $5.0 million from the same period in the prior year, of which $2.5 million in purchases of equipment related to the start-up of a site-based contract in our United States facilities services segment, a $4.8 million increase in payments for an acquisition of a business and earnout agreements, partially offset by $1.3 million of proceeds from the sale of a discontinued operations and sale of assets and an increase in net proceeds from other investing activities. Net cash provided by financing activities of $10.6 million for the nine months ended September 30, 2006 increased $87.1 million compared to net cash used in financing activities of $76.5 million for the nine months ended September 30, 2005. This increase was primarily attributable to the absence of net borrowings under the working capital credit line for 2006 compared to $80.0 million of net borrowings for 2005, to an increase in the proceeds from the exercise of stock options of $4.2 million, and to the excess tax benefit from share-based compensation of $2.9 million for the nine months ended September 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 $ 0.3 $ 0.1 $ 0.2 $ - $ - Capital lease obligations 1.6 0.6 0.8 0.2 - Operating leases 158.8 37.7 59.5 32.6 29.0 Minimum funding requirement for pension plan 6.5 6.5 - - - Open purchase obligations (1) 724.7 630.6 85.7 8.4 - Other long-term obligations (2) 147.5 16.5 131.0 - - -------- ------ ------ ----- ----- Total Contractual Obligations $1,039.4 $692.0 $277.2 $41.2 $29.0 ======== ====== ====== ===== ===== </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 66.0 - 66.0 - - Guarantees 25.0 - - - 25.0 ----- ----- ----- --- ----- Total Commercial Obligations $91.0 $ - $66.0 $ - $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 September 30, 2006 and December 31, 2005, we had approximately $66.0 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 September 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 September 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 $248.7 million and $144.6 million as of September 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 $74.0 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 September 30, 2006 and December 31, 2005, we utilized approximately $62.1 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 nine months ended September 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. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109, "Accounting for Income Taxes"("FIN 48"), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN 48 as of January 1, 2007, as required. We have not determined the effect, if any, the adoption of FIN 48 will have on our financial position and results of operations. In September 2006, the FASB issued Statement No. 157 "Fair Value Measurements ("Statement 157"). Statement 157 provides guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. Statement 157 is effective for financial statements issued beginning with our first quarter 2008 fiscal period. Early adoption is permitted. We have not determined the effect, if any, the adoption of Statement 157 will have on our financial position and results of operations. In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Post Retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R)" ("Statement 158"). Statement 158 requires that a company recognize the overfunded or underfunded status of its defined benefit post retirement plans (other than multiemployer plans) as an asset or liability in its statement of financial position and that it recognize changes in the funded status in the year in which the changes occur through other comprehensive income. Statement 158 also requires the measurement of defined benefit plan assets and obligations as of the fiscal year end, in addition to footnote disclosures. As our common stock is a publicly traded equity security, we are required to recognize the funded status of defined benefit pension plans (we do not have other post retirement benefit plans) and to provide the required footnote disclosures, as of the end of this fiscal year ending December 31, 2006. We have not determined the effect the adoption of Statement 158 will have on our financial position.
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 nine months ended September 30, 2006 and 2005 were $2.4 million and $3.2 million, respectively. At September 30, 2006 and December 31, 2005, accounts receivable of $1,110.9 million and $1,046.4 million, respectively, included allowances of $28.8 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 $4.0 million at September 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 September 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 September 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 $285.2 million and $16.1 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 September 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 nine months ended September 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 September 30, 2006, there were no borrowings outstanding under the facility. Had there been borrowings, they would have borne interest at (1) a rate which is the prime commercial lending rate announced by Harris Nesbitt from time to time (8.25% at September 30, 2006) plus 0% to 1.0% based on certain financial tests or (2) United States dollar LIBOR (at September 30, 2006 the rate was 5.32%) 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 September 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. There have been no new material developments during the quarter ended September 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 June 30, 2006. ITEM 1A. RISK FACTORS. There have been no material changes from the risk factors previously disclosed in our 2005 Form 10-K.
<TABLE> <CAPTION> ITEM 6. EXHIBITS. 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 Certificate of Incorporation of EMCOR on 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 assignor, 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 assignor, and Northern Trust Company, as assignee, of 20% interest of Bank of Montreal in the Credit Agreement to Northern Trust Company 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 Form 8-K (Date of Report October 12, Agreement") 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 Form 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 Form 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 nine months ended September 30, 2006 and Consolidated Financial Statements 2005 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 ** - -------------- * Filed Herewith ** Furnished Herewith </TABLE>
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: October 26, 2006 EMCOR GROUP, INC. ----------------------------------------------- (Registrant) /s/FRANK T. MACINNIS By: ----------------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) /s/MARK A. POMPA By: ----------------------------------------------- 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: October 26, 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: October 26, 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 September 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: October 26, 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 September 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: October 26, 2006 /s/MARK A. POMPA ----------------------------------- Mark A. Pompa Chief Financial Officer