UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2008 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_| Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes |_| No |X| Applicable Only To Corporate Issuers Number of shares of Common Stock outstanding as of the close of business on July 25, 2008: 65,348,090 shares.
EMCOR GROUP, INC. INDEX Page No. PART I - Financial Information Item 1 Financial Statements Condensed Consolidated Balance Sheets - as of June 30, 2008 and December 31, 2007 1 Condensed Consolidated Statements of Operations - three months ended June 30, 2008 and 2007 3 Condensed Consolidated Statements of Operations - six months ended June 30, 2008 and 2007 4 Condensed Consolidated Statements of Cash Flows - six months ended June 30, 2008 and 2007 5 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income - six months ended June 30, 2008 and 2007 6 Notes to Condensed Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3 Quantitative and Qualitative Disclosures about Market Risk 30 Item 4 Controls and Procedures 30 PART II - Other Information Item 1 Legal Proceedings 31 Item 4 Submission of Matters to a Vote of Security Holders 31 Item 6 Exhibits 33
PART I. - FINANCIAL INFORMATION. ITEM 1. FINANCIAL STATEMENTS. EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) - -------------------------------------------------------------------------------- June 30, December 31, 2008 2007 (Unaudited) - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 275,511 $ 251,637 Accounts receivable, net 1,496,411 1,435,268 Costs and estimated earnings in excess of billings on uncompleted contracts 117,085 144,919 Inventories 56,526 52,247 Prepaid expenses and other 56,872 56,935 ---------- ---------- Total current assets 2,002,405 1,941,006 Investments, notes and other long-term receivables 22,329 22,669 Property, plant and equipment, net 88,807 83,963 Goodwill 569,327 563,918 Identifiable intangible assets, net 271,315 252,146 Other assets 13,189 13,157 ---------- ---------- Total assets $2,967,372 $2,876,859 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) - ------------------------------------------------------------------------------- June 30, December 31, 2008 2007 (Unaudited) - ------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under working capital credit line $ -- $ -- Current maturities of long-term debt and capital lease obligations 3,838 3,791 Accounts payable 509,190 537,314 Billings in excess of costs and estimated earnings on uncompleted contracts 644,679 572,431 Accrued payroll and benefits 203,364 215,554 Other accrued expenses and liabilities 200,418 190,349 ---------- ---------- Total current liabilities 1,561,489 1,519,439 Long-term debt and capital lease obligations 197,600 223,453 Other long-term obligations 245,302 248,926 ---------- ---------- Total liabilities 2,004,391 1,991,818 ---------- ---------- Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero issued and outstanding -- -- Common stock, $0.01 par value, 200,000,000 shares authorized, 67,938,506 and 67,821,782 shares issued, respectively 679 678 Capital surplus 392,882 387,288 Accumulated other comprehensive loss (15,654) (15,102) Retained earnings 599,589 526,307 Treasury stock, at cost 2,597,184 and 2,625,497 shares, respectively (14,515) (14,130) ---------- ---------- Total stockholders' equity 962,981 885,041 ---------- ---------- Total liabilities and stockholders' equity $2,967,372 $2,876,859 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)(Unaudited) - ------------------------------------------------------------------------------- Three months ended June 30, 2008 2007 - ------------------------------------------------------------------------------- Revenues $1,722,972 $1,371,954 Cost of sales 1,497,761 1,207,355 ---------- ---------- Gross profit 225,211 164,599 Selling, general and administrative expenses 151,824 123,148 Restructuring expenses 57 -- ---------- ---------- Operating income 73,330 41,451 Interest expense (2,638) (549) Interest income 2,059 3,328 Minority interest (277) (711) ---------- ---------- Income from continuing operations before income taxes 72,474 43,519 Income tax provision 28,520 18,168 ---------- ---------- Income from continuing operations 43,954 25,351 Income from discontinued operation, net of income tax effect -- 799 ---------- ---------- Net income $ 43,954 $ 26,150 ========== ========== Net income per common share - Basic From continuing operations $ 0.67 $ 0.40 From discontinued operation -- 0.01 ---------- ---------- $ 0.67 $ 0.41 ========== ========== Net income per common share - Diluted From continuing operations $ 0.65 $ 0.38 From discontinued operation -- 0.01 ---------- ---------- $ 0.65 $ 0.39 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)(Unaudited) - ------------------------------------------------------------------------------ Six months ended June 30, 2008 2007 - ------------------------------------------------------------------------------ Revenues $3,384,375 $2,658,721 Cost of sales 2,969,239 2,365,109 ---------- ---------- Gross profit 415,136 293,612 Selling, general and administrative expenses 292,066 234,715 Restructuring expenses 71 93 ---------- ---------- Operating income 122,999 58,804 Interest expense (6,625) (1,087) Interest income 5,192 6,577 Minority interest (353) (1,115) ---------- ---------- Income from continuing operations before income taxes 121,213 63,179 Income tax provision 47,931 26,303 ---------- ---------- Income from continuing operations 73,282 36,876 Income from discontinued operation, net of income tax effect -- 1,266 ---------- ---------- Net income $ 73,282 $ 38,142 ========== ========== Net income per common share - Basic From continuing operations $ 1.12 $ 0.58 From discontinued operation -- 0.02 ---------- ---------- $ 1.12 $ 0.60 ========== ========== Net income per common share - Diluted From continuing operations $ 1.09 $ 0.55 From discontinued operation -- 0.02 ---------- ---------- $ 1.09 $ 0.57 ========== ========== See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)(Unaudited) - ------------------------------------------------------------------------------------------------------ Six months ended June 30, 2008 2007 - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: <S> <C> <C> Net income $ 73,282 $ 38,142 Depreciation and amortization 12,332 9,324 Amortization of identifiable intangible assets 12,193 2,321 Minority interest 353 1,115 Deferred income taxes (11,614) 543 Excess tax benefits from share-based compensation (665) (6,136) Equity income from unconsolidated entities (481) (1,951) Other non-cash items 4,149 4,455 Distributions from unconsolidated entities 2,553 3,946 Changes in operating assets and liabilities 18,648 10,534 -------- -------- Net cash provided by operating activities 110,750 62,293 -------- -------- Cash flows from investing activities: Payments for acquisitions of businesses, identifiable intangible assets and related earn-out agreements (44,123) (4,001) Proceeds from sale of property, plant and equipment 627 2,384 Purchase of property, plant and equipment (16,086) (9,847) Investment in and advances to unconsolidated entities and joint ventures (1,292) (1,510) Net disbursements related to other investments (238) (116) -------- -------- Net cash used in investing activities (61,112) (13,090) -------- -------- Cash flows from financing activities: Proceeds from working capital credit line 58,500 -- Repayments of working capital credit line (58,500) -- Repayments of long-term debt (26,585) (28) Repayments of capital lease obligations (509) (463) Proceeds from exercise of stock options 922 5,773 Excess tax benefits from share-based compensation 665 6,136 -------- -------- Net cash (used in) provided by financing activities (25,507) 11,418 -------- -------- Effect of exchange rate changes on cash and cash equivalents (257) 1,979 -------- -------- Increase in cash and cash equivalents 23,874 62,600 Cash and cash equivalents at beginning of year 251,637 273,735 -------- -------- Cash and cash equivalents at end of period $275,511 $336,335 ======== ======== Supplemental cash flow information: Cash paid for: Interest $ 5,586 $ 921 Income taxes $ 51,948 $ 33,875 Non-cash financing activities: Assets acquired under capital lease obligations $ 393 $ 286 Contingent purchase price accrued $ 3,687 $ -- </TABLE> See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands)(Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated other Common Capital comprehensive Retained Treasury Comprehensive Total stock surplus income (loss )(1) earnings stock income - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 2007 $710,309 $673 $354,905 $(28,189) $399,804 $(16,884) Net income 38,142 -- -- -- 38,142 -- $38,142 Foreign currency translation adjustments 4,518 -- -- 4,518 -- -- 4,518 Amortization of unrecognized pension losses, net of tax benefit of $0.4 million 964 -- -- 964 -- -- 964 ------- Comprehensive income $43,624 ======= Effect of adopting FIN 48 (305) -- -- -- (305) -- Issuance of treasury stock for restricted stock units (2) -- -- (261) -- -- 261 Treasury stock, at cost (3) (911) -- -- -- -- (911) Common stock issued under stock option plans, net (4) 13,422 3 12,027 -- -- 1,392 Share-based compensation expense 4,430 -- 4,430 -- -- -- -------- ---- -------- -------- -------- -------- Balance, June 30, 2007 $770,569 $676 $371,101 $(22,707) $437,641 $(16,142) ======== ==== ======== ======== ======== ======== Balance, January 1, 2008 $885,041 $678 $387,288 $(15,102) $526,307 $(14,130) Net income 73,282 -- -- -- 73,282 -- $73,282 Foreign currency translation adjustments (1,372) -- -- (1,372) -- -- (1,372) Amortization of unrecognized pension losses, net of tax benefit of $0.3 million 820 -- -- 820 -- -- 820 ------- Comprehensive income $72,730 ======= Issuance of treasury stock for restricted stock units (2) -- -- (108) -- -- 108 Treasury stock, at cost (3) (493) -- -- -- -- (493) Common stock issued under stock option plans, net (4) 2,066 1 2,065 -- -- -- Share-based compensation expense 3,637 -- 3,637 -- -- -- -------- ---- -------- -------- -------- -------- Balance, June 30, 2008 $962,981 $679 $392,882 $(15,654) $599,589 $(14,515) ======== ==== ======== ======== ======== ======== </TABLE> (1) Represents cumulative foreign currency translation adjustments and pension liability adjustments. (2) Represents common stock transferred at cost from treasury stock upon the issuance of shares in respect of restricted stock units. (3) Represents value of shares of common stock returned to EMCOR to satisfy income tax withholding requirements upon the issuance of shares in respect of restricted stock units. (4) Includes the tax benefit of stock option exercises of $0.8 million and $7.6 million for the six months ended June 30, 2008 and 2007, respectively. See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE A Basis of Presentation The accompanying condensed consolidated financial statements have been prepared without audit, pursuant to the interim period reporting requirements of Form 10-Q. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. References to the "Company," "EMCOR," "we," "us," "our" and words of similar import refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise. Readers of this report should refer to the consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of a normal recurring nature) necessary to present fairly our financial position and the results of our operations. The results of operations for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008. On July 9, 2007, 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 June 20, 2007. The capital stock accounts, all share data and earnings per share data give effect to the stock split, applied retroactively, to all periods presented. The results of operations for the 2007 period presented reflect discontinued operations accounting due to the sale of an ownership interest in a consolidated joint venture in August 2007. Certain reclassifications of prior year amounts have been made to conform to current year presentation. NOTE B New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 157, "Fair Value Measurements" ("Statement 157"). Statement 157 provides guidance for using fair value to measure assets and liabilities. The statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. Statement 157 was effective for our financial statements beginning with the first quarter of 2008. The adoption of Statement 157 did not affect our financial position or the results of operations. However, on February 12, 2008, the FASB issued FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP") that amends Statement 157 to delay the effective date for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). The FSP defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008. We have not determined the effect, if any, the adoption of the FSP will have on our financial position and results of operations. However, we believe we would likely be required to provide additional disclosures in future financial statements beginning after the effective date of the new standard. In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" ("Statement 159"). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Statement 159 was effective for our financial statements beginning with the first quarter of 2008. We have elected not to account for any additional financial instruments or other items at fair value pursuant to Statement 159. In December 2007, the FASB issued Statement No. 141 (revised 2007), "Business Combinations" ("Statement 141(R)"). Statement 141(R) changes the accounting for acquisitions, specifically eliminating the step acquisition model, changing the recognition of contingent consideration from being recognized when it is probable to recognition at the time of acquisition, disallowing the capitalization of transaction costs and changing when restructurings related to acquisitions can be recognized. The standard is effective for fiscal years beginning on or after December 15, 2008 and will only impact the accounting for acquisitions that are made after adoption.
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE B New Accounting Pronouncements - (continued) In December 2007, the FASB issued Statement No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("Statement 160"). This statement is effective for fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. This statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from our equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also amends certain of ARB No. 51's consolidation procedures for consistency with the requirements of Statement 141(R). This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. We have not determined the effect, if any, the adoption of Statement 160 will have on our financial position and results of operations. NOTE C Acquisitions of Businesses On January 3, 2008, February 29, 2008 and April 1, 2008, we acquired three companies, which were not material individually or in the aggregate, for an aggregate purchase price of $41.5 million. One of the companies primarily provides industrial services to refineries in the Southern California market and another company primarily performs mobile mechanical services in central Florida. Both of these companies' results have been included in our United States facilities services reporting segment. The third company is a fire protection company that has been included in our United States mechanical construction and facilities services reporting segment. Goodwill and intangible assets attributable to these companies, in the aggregate, were preliminarily valued at $10.0 million and $21.3 million, respectively, representing the excess purchase price over the fair value amounts assigned to their net tangible assets. We believe these acquisitions further our goal of service and geographical diversification and expansion of our facilities services and fire protection businesses. The purchase prices of these and other acquisitions are subject to finalization based on certain contingencies provided for in their respective purchase agreements. These acquisitions were accounted for by the purchase method, and the purchase prices have been allocated to the assets acquired and liabilities assumed, based upon the preliminary estimated fair values of the respective assets and liabilities of the acquired companies at their respective acquisition dates. The following table presents unaudited pro forma results of operations, including all companies acquired during 2007, as if the acquisitions had occurred at the beginning of the period. The pro forma results of operations are not necessarily indicative of the results of operations had the acquisitions actually occurred at the beginning of fiscal 2007, nor is it necessarily indicative of future operating results (in thousands, except per share data): <TABLE> <CAPTION> For the For the three months ended six months ended June 30, 2007 June 30, 2007 ------------------ ------------------ <S> <C> <C> Revenues $ 1,487,307 $ 2,890,568 Operating income $ 56,047 $ 90,627 Income from continuing operations $ 29,318 $ 46,431 Net income $ 30,117 $ 47,697 Diluted earnings per share from continuing operations $ 0.44 $ 0.70 Diluted earnings per share $ 0.45 $ 0.72 </TABLE> The above unaudited pro forma results include additional interest expense associated with our $300.0 million term loan, the loss of interest income related to the use of cash for the acquisitions and the amortization expense associated with the preliminary value placed on the identifiable intangible assets related to companies acquired during 2007. The value we ascribed to contract backlog of FR X Ohmstede Acquisition Co. ("Ohmstede"), which we acquired in September 2007, is being expensed in a manner consistent with its expected revenue recognition.
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE D Disposition of Assets Results of operations for the three and six months ended June 30, 2007 presented in our Condensed Consolidated Statements of Operations reflect discontinued operations accounting. On August 6, 2007, we sold our majority ownership in a joint venture with CB Richard Ellis, Inc. ("CBRE") to CBRE for $8.0 million. This sale followed our purchase, for approximately $0.5 million, of certain of the joint venture's assets. As of June 30, 2008, the entire sale price of $8.0 million had been received. The components of the results of discontinued operations for the joint venture are as follows (in thousands, except per share data): <TABLE> <CAPTION> For the For the three months ended six months ended June 30, 2007 June 30, 2007 ------------------ ------------------ <S> <C> <C> Revenues $ 34,278 $ 65,859 Income from discontinued operation $ 799 $ 1,266 Gain on sale of discontinued operation $ -- $ -- Net income from discontinued operation $ 799 $ 1,266 Diluted earnings per share from discontinued operation $ 0.01 $ 0.02 </TABLE> NOTE E Earnings Per Share Calculation of Basic and Diluted Earnings per Share The following tables summarize our calculation of Basic and Diluted Earnings per Share ("EPS") for the three and six month periods ended June 30, 2008 and 2007 as adjusted for the July 9, 2007 2-for-1 stock split (in thousands, except share and per share data): <TABLE> For the three months ended June 30, --------------------------- 2008 2007 ----------- ----------- <S> <C> <C> Numerator: Income before discontinued operation $ 43,954 $ 25,351 Income from discontinued operation -- 799 ----------- ----------- Net income available to common stockholders $ 43,954 $ 26,150 =========== =========== Denominator: Weighted average shares outstanding used to compute basic earnings per share 65,322,768 64,195,339 Effect of diluted securities - Share-based awards 1,978,349 2,459,335 ----------- ----------- Shares used to compute diluted earnings per share 67,301,117 66,654,674 =========== =========== Basic earnings per share: Continuing operations $ 0.67 $ 0.40 Discontinued operation -- 0.01 ----------- ----------- Total $ 0.67 $ 0.41 =========== =========== Diluted earnings per share: Continuing operations $ 0.65 $ 0.38 Discontinued operation -- 0.01 ----------- ----------- Total $ 0.65 $ 0.39 =========== =========== </TABLE>
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE E Earnings Per Share - (continued) For the six months ended June 30, --------------------------- 2008 2007 ----------- ----------- Numerator: <S> <C> <C> Income before discontinued operation $ 73,282 $ 36,876 Income from discontinued operation -- 1,266 ----------- ----------- Net income available to common stockholders $ 73,282 $ 38,142 =========== =========== Denominator: Weighted average shares outstanding used to compute basic earnings per share 65,294,160 64,013,213 Effect of diluted securities - Share-based awards 1,842,950 2,456,941 ----------- ----------- Shares used to compute diluted earnings per share 67,137,110 66,470,154 =========== =========== Basic earnings per share: Continuing operations $ 1.12 $ 0.58 Discontinued operation -- 0.02 ----------- ----------- Total $ 1.12 $ 0.60 =========== =========== Diluted earnings per share: Continuing operations $ 1.09 $ 0.55 Discontinued operation -- 0.02 ----------- ----------- Total $ 1.09 $ 0.57 =========== =========== </TABLE> There were 145,624 and 295,624 anti-dilutive stock options that were excluded from the calculation of diluted EPS for the three and six month periods ended June 30, 2008, respectively. There were 120,000 stock options that were excluded from the calculation of diluted EPS for the three and six month periods ended June 30, 2007.
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE F Inventories Inventories consist of the following amounts (in thousands): June 30, December 31, 2008 2007 ------------ ------------ <S> <C> <C> Raw materials and construction materials $ 26,790 $ 21,116 Work in process 31,236 32,515 Reserve for obsolescence (1,500) (1,384) ------------ ------------ $ 56,526 $ 52,247 ============ ============ </TABLE> <TABLE> <CAPTION> NOTE G Long-Term Debt Long-term debt in the accompanying Condensed Consolidated Balance Sheets consisted of the following amounts (in thousands): June 30, December 31, 2008 2007 ------------ ------------ <S> <C> <C> Term Loan $ 199,250 $ 225,000 Capitalized lease obligations 2,129 2,151 Other 59 93 ------------ ------------ 201,438 227,244 Less: current maturities 3,838 3,791 ------------ ------------ $ 197,600 $ 223,453 ============ ============ </TABLE> On September 19, 2007, we entered into an agreement providing for a $300.0 million term loan ("Term Loan"). The proceeds were used to pay a portion of the consideration for the acquisition of Ohmstede and costs and expenses incident thereto. The Term Loan contains covenants, representations and warranties and events of default. The Term Loan covenants require, among other things, maintenance of certain financial ratios and contain certain restrictions with respect to payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. We are required to make principal payments on the Term Loan in installments on the last day of March, June, September and December of each year, commencing March 2008 in the amount of $0.75 million, together with interest on the then outstanding principal amount. A final payment comprised of all remaining principal and interest is due on October 17, 2010. The Term Loan is secured by substantially all of our assets and substantially all of the assets of substantially all of our U.S. subsidiaries. The Term Loan bears interest at (1) the prime commercial lending rate announced by Bank of Montreal from time to time (5.00% at June 30, 2008) plus 0.0% to 0.5% based on certain financial tests or (2) U.S. dollar LIBOR (2.46% at June 30, 2008) plus 1.0% to 2.25% based on certain financial tests. The interest rate in effect at June 30, 2008 was 3.46%. Since September 19, 2007, we have made prepayments of $99.25 million, and mandatory payments of $1.5 million, to reduce the balance of the Term Loan to $199.25 million at June 30, 2008. We capitalized approximately $4.0 million of debt issuance costs associated with the Term Loan. This amount is being amortized over the life of the loan and is included as part of interest expense. On March 31, 2008, we made a prepayment of principal under the Term Loan of $24.25 million, which resulted in our recording as interest expense accelerated amortization expense related to capitalized debt issuance costs of $0.3 million for the six months ended June 30, 2008.
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE H Income Taxes For the three months ended June 30, 2008 and 2007, our income tax provisions were $28.5 million and $18.2 million, respectively, based on effective income tax rates of 39% and 42%, respectively. For the six months ended June 30, 2008 and 2007, our income tax provisions were $47.9 million and $26.3 million, respectively, based on effective income tax rates of 40% and 42%, respectively. As of June 30, 2008 and December 31, 2007, the total liability for unrecognized income tax benefits was $9.7 million and $8.8 million, respectively (of which $5.5 million and $5.2 million at June 30, 2008 and December 31, 2007, respectively, would favorably affect our effective income tax rate, if recognized). The increase in the unrecognized income tax benefit was attributable to uncertain intercompany transfer pricing items. We recognized interest expense related to liabilities for unrecognized income tax benefits in the income tax provision. As of June 30, 2008 and December 31, 2007, we had approximately $3.5 million and $3.2 million, respectively, of accrued interest related to unrecognized income tax benefits included as a liability on the Condensed Consolidated Balance Sheets, of which approximately $0.2 million and $0.3 million was recorded during each of the three and six months ended June 30, 2008. It is possible that approximately $3.4 million of income tax liability for unrecognized income tax benefits at June 30, 2008, related primarily to uncertain intercompany transfer pricing items, will become a recognized income tax benefit in the next twelve months due to the expiration of applicable statutes of limitations. The tax years 2004 to 2007 remain open to examination by United States taxing jurisdictions, and the tax years 2000 to 2007 remain open to examination by foreign taxing jurisdictions. NOTE I Common Stock On September 18, 2007, our stockholders approved an amendment to our Restated Certificate of Incorporation authorizing an increase in the number of shares of our common stock from 80.0 million shares to 200.0 million shares. On July 9, 2007, we effected a 2-for-1 stock split in the form of a stock distribution of one common share for each common share owned, payable to stockholders of record on June 20, 2007. As of June 30, 2008 and December 31, 2007, 65,341,322 and 65,196,285 shares of our common stock were outstanding, respectively. For the three months ended June 30, 2008 and 2007, 65,628 and 635,944 shares of common stock, respectively, were issued upon the exercise of stock options and upon the satisfaction of required conditions under certain of our share-based compensation plans. For the six months ended June 30, 2008 and 2007, 165,612 and 779,256 shares of common stock, respectively, were issued upon the exercise of stock options, upon the satisfaction of required conditions under certain of our share-based compensation plans and upon the grants of shares of common stock. On June 18, 2008, our stockholders approved the adoption by our Board of Directors of an Employee Stock Purchase Plan (the "Stock Purchase Plan"), which will become effective on October 1, 2008. Under the terms of the Stock Purchase Plan, the maximum number of shares of our common stock that may be purchased is 3,000,000 shares. Generally, our employees and non-union employees of our United States and Canadian subsidiaries will be eligible to participate in the Stock Purchase Plan. Employees covered by collective bargaining agreements generally will not be eligible to participate. NOTE J Retirement Plans Our United Kingdom subsidiary has a defined benefit pension plan covering all eligible employees (the "UK Plan"); however, no individual joining the company after October 31, 2001 may participate in the plan.
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE J Retirement Plans - (continued) Components of Net Periodic Pension Benefit Cost The components of net periodic pension benefit cost of the UK Plan for three and six months ended June 30, 2008 and 2007 were as follows (in thousands): For the three months ended June 30, For the six months ended June 30, ----------------------------------- --------------------------------- 2008 2007 2008 2007 ------- ------- ------- ------- <S> <C> <C> <C> <C> Service cost $ 1,160 $ 1,644 $ 2,323 $ 3,262 Interest cost 3,801 3,413 7,612 6,772 Expected return on plan assets (3,807) (3,427) (7,624) (6,800) Amortization of prior service cost and actuarial loss -- -- -- -- Amortization of unrecognized loss 546 681 1,094 1,351 ------- ------- ------- ------- Net periodic pension benefit cost $ 1,700 $ 2,311 $ 3,405 $ 4,585 ======= ======= ======= ======= </TABLE> Employer Contributions For the six months ended June 30, 2008, our United Kingdom subsidiary contributed $5.6 million to its defined benefit pension plan. It anticipates contributing an additional $5.3 million during the remainder of 2008. NOTE K Segment Information We have the following reportable segments which provide services associated with the design, integration, installation, start-up, operation and maintenance of various systems: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; premises electrical and lighting systems; low-voltage systems, such as fire alarm, security and process control; voice and data communication; roadway and transit lighting; and fiber optic lines); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation; fire protection; plumbing, process and high-purity piping; water and wastewater treatment and central plan heating and cooling); (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 (industrial maintenance and services; commercial and government site-based operations and maintenance; military base operations support services; mobile maintenance and services; facilities management; installation and support for building systems; technical consulting and diagnostic services; small modification and retrofit projects; and program development, management and maintenance for energy systems), which services are not generally related to customers' construction programs, as well as industrial services operations, which primarily provide aftermarket maintenance and repair services, replacement parts and fabrication services for highly engineered shell and tube heat exchangers for the refinery and petrochemical industries. The Canada, United Kingdom and Other international segments perform electrical construction, mechanical construction and facilities services. Our "Other international construction and facilities services" segment, currently operating only in the Middle East, represents our operations outside of the United States, Canada and the United Kingdom. The following tables present information about our segments and geographic areas for the three and six months ended June 30, 2008 and 2007 (in thousands):
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE K Segment Information - (continued) For the three months ended June 30, ----------------------------------- 2008 2007 ---------- ---------- Revenues from unrelated entities: <S> <C> <C> United States electrical construction and facilities services $ 429,915 $ 342,431 United States mechanical construction and facilities services 626,725 561,583 United States facilities services 403,218 224,976 ---------- ---------- Total United States operations 1,459,858 1,128,990 Canada construction and facilities services 96,496 74,126 United Kingdom construction and facilities services 166,618 168,838 Other international construction and facilities services -- -- ---------- ---------- Total worldwide operations $1,722,972 $1,371,954 ========== ========== </TABLE> <TABLE> <CAPTION> For the three months ended June 30, ----------------------------------- 2008 2007 ---------- ---------- Total revenues: <S> <C> <C> United States electrical construction and facilities services $ 430,906 $ 343,825 United States mechanical construction and facilities services 633,818 562,556 United States facilities services 405,535 225,806 Less intersegment revenues (10,401) (3,197) ---------- ---------- Total United States operations 1,459,858 1,128,990 Canada construction and facilities services 96,496 74,126 United Kingdom construction and facilities services 166,618 168,838 Other international construction and facilities services -- -- ---------- ---------- Total worldwide operations $1,722,972 $1,371,954 ========== ========== </TABLE> <TABLE> <CAPTION> For the six months ended June 30, ----------------------------------- 2008 2007 ---------- ---------- Revenues from unrelated entities: <S> <C> <C> United States electrical construction and facilities services $ 831,193 $ 657,403 United States mechanical construction and facilities services 1,228,899 1,080,347 United States facilities services 756,662 441,284 ---------- ---------- Total United States operations 2,816,754 2,179,034 Canada construction and facilities services 202,200 133,451 United Kingdom construction and facilities services 365,421 346,236 Other international construction and facilities services -- -- ---------- ---------- Total worldwide operations $3,384,375 $2,658,721 ========== ========== </TABLE> <TABLE> <CAPTION> For the six months ended June 30, ----------------------------------- 2008 2007 ---------- ---------- Total revenues: <S> <C> <C> United States electrical construction and facilities services $ 833,183 $ 661,025 United States mechanical construction and facilities services 1,240,278 1,082,062 United States facilities services 760,692 443,178 Less intersegment revenues (17,399) (7,231) ---------- ---------- Total United States operations 2,816,754 2,179,034 Canada construction and facilities services 202,200 133,451 United Kingdom construction and facilities services 365,421 346,236 Other international construction and facilities services -- -- ---------- ---------- Total worldwide operations $3,384,375 $2,658,721 ========== ========== </TABLE>
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE K Segment Information - (continued) For the three months ended June 30, ----------------------------------- 2008 2007 ---------- ---------- Operating income (loss): <S> <C> <C> United States electrical construction and facilities services $ 24,869 $ 21,179 United States mechanical construction and facilities services 25,298 28,475 United States facilities services 35,080 9,860 ---------- ---------- Total United States operations 85,247 59,514 Canada construction and facilities services 3,155 807 United Kingdom construction and facilities services 3,913 (2,178) Other international construction and facilities services -- (162) Corporate administration (18,928) (16,530) Restructuring expenses (57) -- ---------- ---------- Total worldwide operations 73,330 41,451 Other corporate items: Interest expense (2,638) (549) Interest income 2,059 3,328 Minority interest (277) (711) ---------- ---------- Income from continuing operations before income taxes $ 72,474 $ 43,519 ========== ========== </TABLE> <TABLE> <CAPTION> For the six months ended June 30, ----------------------------------- 2008 2007 ---------- ---------- Operating income (loss): <S> <C> <C> United States electrical construction and facilities services $ 42,085 $ 32,105 United States mechanical construction and facilities services 42,942 41,827 United States facilities services 60,621 17,494 ---------- ---------- Total United States operations 145,648 91,426 Canada construction and facilities services 5,615 (392) United Kingdom construction and facilities services 6,038 (1,751) Other international construction and facilities services (596) (278) Corporate administration (33,635) (30,108) Restructuring expenses (71) (93) ---------- ---------- Total worldwide operations 122,999 58,804 Other corporate items: Interest expense (6,625) (1,087) Interest income 5,192 6,577 Minority interest (353) (1,115) ---------- ---------- Income from continuing operations before income taxes $ 121,213 $ 63,179 ========== ========== </TABLE>
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE K Segment Information - (continued) June 30, December 31, 2008 2007 ---------- ----------- Total assets: <S> <C> <C> United States electrical construction and facilities services $ 426,422 $ 400,403 United States mechanical construction and facilities services 830,539 842,306 United States facilities services 1,069,876 1,001,617 ---------- ---------- Total United States operations 2,326,837 2,244,326 Canada construction and facilities services 143,182 146,320 United Kingdom construction and facilities services 269,795 268,336 Other international construction and facilities services -- 246 Corporate administration 227,558 217,631 ---------- ---------- Total worldwide operations $2,967,372 $2,876,859 ========== ========== </TABLE> Included in the operating loss of $0.4 million for the Canada construction and facilities services segment for the six months ended June 30, 2007 was a gain on the sale of property of $1.4 million. NOTE L Legal Proceedings See Part II - Other Information, Item 1. Legal Proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We are one of the largest mechanical and electrical construction and facilities services firms in the United States, Canada, the United Kingdom and in the world. We provide services to a broad range of commercial, industrial, utility and institutional customers through approximately 70 principal operating subsidiaries and joint venture entities. Our offices are located in the United States, Canada and the United Kingdom. In the Middle East, we carry on business through a joint venture. Overview On July 9, 2007, 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 June 20, 2007. The earnings per share data give effect to the stock split, applied retroactively, to all periods presented. The following table presents selected financial data for the three months ended June 30, 2008 and 2007 (in thousands, except percentages and per share data): <TABLE> <CAPTION> For the three months ended June 30, ----------------------------------- 2008 2007 ---------- ---------- <S> <C> <C> Revenues $1,722,972 $1,371,954 Revenues increase from prior year 25.6% 15.1% Operating income $ 73,330 $ 41,451 Operating income as a percentage of revenues 4.3% 3.0% Net income $ 43,954 $ 26,150 Diluted earnings per share from continuing operations $ 0.65 $ 0.38 Cash flows provided by operating activities $ 110,750 $ 62,293 </TABLE> The results of our operations for the second quarter of 2008 set new Company records for a second quarter in terms of revenues, operating income, operating margin (operating income as a percentage of revenues), net income and diluted earnings per share. These increases were generally attributable to (a) companies acquired during the last 12 months, (b) increased revenues from, and improved performance of, United States construction projects in the hospitality and industrial markets, (c) improved results of our Canada and United Kingdom construction and facilities services segments, (d) continued profit contributions attributable to other construction projects and (e) increased revenues from, and improved performance by, our United States facilities services operations (excluding companies acquired during the last 12 months). The results of our Canada and United Kingdom construction and facilities services segments improved for the 2008 second quarter compared to the year ago quarter due to (a) several automotive, healthcare and power generation projects in Canada and (b) the completion of rail projects in the United Kingdom in 2007 in connection with which we had incurred losses in 2007. During the second quarter of 2008, companies we acquired during the last 12 months contributed $186.2 million to revenues and $24.9 million to operating income (including $4.7 million of amortization expense attributable to identifiable intangible assets recorded to cost of sales and selling, general and administrative expenses). Companies acquired during the last 12 months, which primarily perform industrial facilities services and mobile mechanical services and are reported within the United States facilities services segment, contributed $156.5 million and $22.6 million to the increases in revenues and operating income, respectively. The balance of the increases in revenues and operating income attributable to companies acquired during the last 12 months are reported within the United States mechanical construction and facilities services segment. In connection with a project (the "Project") for the construction in Virginia of a wastewater treatment facility for the Upper Occoquan Sewage Authority ("UOSA"), in which our subsidiary Poole and Kent Corporation participated as a co-venturer with an unrelated party (the "Joint Venture"), the Joint Venture in 2000 commenced a civil action (the "UOSA Action") in the Fairfax, Virginia Circuit Court against UOSA alleging material breaches of the construction contract for the Project. During the second quarter of 2008, certain related claims asserted by the Joint Venture against UOSA, and a claim by UOSA against the Joint Venture for certain legal fees, were the subject of a trial. Following a jury verdict in that trial, we recorded a $7.9 million expense due to (a) the unsuccessful collection of project costs incurred by Poole and Kent Corporation in connection with work performed on behalf of the Joint Venture in connection with the Project and (b) an award to UOSA for certain of its legal fees. Substantially all of the $7.9 million expense represents a non-cash charge. Further information regarding the UOSA Action is included in Part II - Other Information, Item 1. Legal Proceedings.
We completed three acquisitions during the first six months of 2008 for an aggregate purchase price of $41.5 million. One of the companies primarily provides industrial services to refineries in the Southern California market and another company primarily performs mobile mechanical services in central Florida. Both of these companies' results have been included in our United States facilities services reporting segment. The third company is a fire protection company that has been included in our United States mechanical construction and facilities services reporting segment. These acquisitions expand our service and geographical offering capabilities. The acquisitions are not material, individually or in the aggregate, to our results of operations for the periods presented. Operating Segments We have the following reportable segments which provide services associated with the design, integration, installation, start-up, operation and maintenance of various systems: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; premises electrical and lighting systems; low-voltage systems, such as fire alarm, security and process control; voice and data communication; roadway and transit lighting; and fiber optic lines); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation; fire protection; plumbing, process and high-purity piping; water and wastewater treatment and central plan heating and cooling); (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 (industrial maintenance and services; commercial and government site-based operations and maintenance; military base operations support services; mobile maintenance and services; facilities management; installation and support for building systems; technical consulting and diagnostic services; small modification and retrofit projects; and program development, management and maintenance for energy systems), which services are not generally related to customers' construction programs, as well as industrial services operations, which primarily provide aftermarket maintenance and repair services, replacement parts and fabrication services for highly engineered shell and tube heat exchangers for the refinery and petrochemical industries. The Canada, United Kingdom and Other international segments perform electrical construction, mechanical construction and facilities services. Our "Other international construction and facilities services" segment, currently operating only in the Middle East, represents our operations outside of the United States, Canada and the United Kingdom. Results of Operations Our reportable segments reflect discontinued operations accounting for the three and six months ended June 30, 2007.
Revenues The following table presents our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended June 30, ----------------------------------------------- % of % of 2008 Total 2007 Total ---------- ----- ---------- ----- Revenues: <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 429,915 25% $ 342,431 25% United States mechanical construction and facilities services 626,725 36% 561,583 41% United States facilities services 403,218 23% 224,976 16% ---------- ---------- Total United States operations 1,459,858 85% 1,128,990 82% Canada construction and facilities services 96,496 6% 74,126 5% United Kingdom construction and facilities services 166,618 10% 168,838 12% Other international construction and facilities services -- -- -- -- ---------- ---------- Total worldwide operations $1,722,972 100% $1,371,954 100% ========== ========== </TABLE> <TABLE> <CAPTION> For the six months ended June 30, ----------------------------------------------- % of % of 2008 Total 2007 Total ---------- ----- ---------- ----- Revenues: <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 831,193 25% $ 657,403 25% United States mechanical construction and facilities services 1,228,899 36% 1,080,347 41% United States facilities services 756,662 22% 441,284 17% ---------- ---------- Total United States operations 2,816,754 83% 2,179,034 82% Canada construction and facilities services 202,200 6% 133,451 5% United Kingdom construction and facilities services 365,421 11% 346,236 13% Other international construction and facilities services -- -- -- -- ---------- ---------- Total worldwide operations $3,384,375 100% $2,658,721 100% ========== ========== </TABLE> As described below in more detail, our revenues for the three months ended June 30, 2008 increased to $1.7 billion compared to $1.4 billion of revenues for the three months ended June 30, 2007, and our revenues for the six months ended June 30, 2008 increased to $3.4 billion compared to $2.7 billion for the six months ended June 30, 2007. The increase in 2008 revenues compared to 2007 revenues was generally attributable to companies acquired during the last 12 months, increased construction work in the United States for the hospitality and industrial markets, and increased work by our United States facilities services operations, primarily by those companies performing mobile mechanical services. The revenues of our Canada and United Kingdom construction and facilities services segments also increased for the six months ended June 30, 2008 compared to the same period in 2007. Our backlog at June 30, 2008 was $4.67 billion compared to $4.26 billion of backlog at June 30, 2007. Our backlog was $4.49 billion at December 31, 2007. The increases in backlog were primarily due to increased awards of industrial, transportation and water/wastewater construction projects, partially offset by a decrease in the backlog of hospitality contracts awarded to us in 2007 as we perform work on these hospitality contracts. Backlog is not a term recognized under United States generally accepted accounting principles; however, it is a common measurement used in our industry. Backlog includes unrecognized revenues to be realized from uncompleted construction contracts plus unrecognized revenues expected to be realized over the remaining term of facilities services contracts. However, if the remaining term of a facilities services contract exceeds 12 months, the unrecognized revenues attributable to such contract included in backlog are limited to only 12 months of revenues. Revenues of our United States electrical construction and facilities services segment for the three months ended June 30, 2008 increased $87.5 million compared to the three months ended June 30, 2007. Revenues of this segment for the six months ended June 30, 2008 increased $173.8 million compared to the six months ended June 30, 2007. The revenues increases were primarily attributable to an increase in awards to us of industrial and hospitality construction contracts.
Revenues of our United States mechanical construction and facilities services segment for the three months ended June 30, 2008 increased $65.1 million compared to the three months ended June 30, 2007. Revenues of this segment for the six months ended June 30, 2008 increased $148.6 million compared to the six months ended June 30, 2007. The revenues increases were primarily attributable to an increase in awards to us of hospitality and industrial construction contracts. Companies acquired during the last 12 months contributed $29.7 million and $63.2 million, respectively, to the increase in revenues for the three and six months ended June 30, 2008. Our United States facilities services revenues increased $178.2 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Revenues of this segment increased $315.4 million for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. The increases in revenues during the three and six months ended June 30, 2008 were primarily attributable to revenues of $156.5 million and $283.5 million, respectively, from companies acquired during the last 12 months (most of which were from companies that perform industrial facilities services) and the balance was primarily from our mobile mechanical services operations. Revenues of our Canada construction and facilities services segment increased by $22.4 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Revenues of this segment increased $68.7 million for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. $7.7 million and $22.5 million of the increases in revenues for the three and six months ended June 30, 2008, respectively, were a result of the strengthening of the Canadian dollar against the United States dollar, and the balance of the increases were attributable to automotive, healthcare and power generation contracts. United Kingdom construction and facilities services revenues decreased $2.2 million for the three months ended June 30, 2008, compared to the three months ended June 30, 2007. Approximately one-half of this decrease was a result of the weakening of the British pound against the United States dollar. Revenues of this segment increased $19.2 million for the six months ended June 30, 2008, compared to the six months ended June 30, 2007. Most of this increase was due to an increase in the number of healthcare and institutional contracts awarded to us, and $1.1 million of the increase related to the strengthening of the British pound against the United States dollar. Other international construction and facilities services activities consist of operations in the Middle East. All of the current projects in this market are being performed through a joint venture. The results of the joint venture were accounted for under the equity method. Cost of sales and Gross profit The following table presents our cost of sales, gross profit, and gross profit as a percentage of revenues (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended June 30, For the six months ended June 30, ----------------------------------- --------------------------------- 2008 2007 2008 2007 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Cost of sales $1,497,761 $1,207,355 $2,969,239 $2,365,109 Gross profit $ 225,211 $ 164,599 $ 415,136 $ 293,612 Gross profit, as a percentage of revenues 13.1% 12.0% 12.3% 11.0% </TABLE> Our gross profit (revenues less cost of sales) increased $60.6 million for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Gross profit increased $121.5 million for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Gross profit as a percentage of revenues was 13.1% and 12.0% for the three months ended June 30, 2008 and 2007, respectively. Gross profit as a percentage of revenues was 12.3% and 11.0% for the six months ended June 30, 2008 and 2007, respectively. The increase in gross profit for the 2008 periods compared to the 2007 periods was primarily attributable to companies acquired during the last 12 months and other increases in revenues from other United States operations, as well as from our international businesses. Companies acquired during the last 12 months contributed $44.5 million and $83.0 million to gross profit for the three and six months ended June 30, 2008, respectively. Gross profit, as a percentage of revenues (gross margin), also improved primarily as a result of (a) companies acquired during the last 12 months that are reported within the United States facilities services segment and provide services to the industrial market, (b) companies acquired during the last 12 months that are reported within the United States mechanical construction and facilities services segment and (c) improved operating performance by our international businesses. The improvements in gross profit and gross margin were negatively impacted by the $7.9 million expense in connection with the UOSA Action.
Selling, general and administrative expenses The following table presents our selling, general and administrative expenses, and selling, general and administrative expenses as a percentage of revenues (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended June 30, For the six months ended June 30, ----------------------------------- --------------------------------- 2008 2007 2008 2007 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Selling, general and administrative expenses $ 151,824 $ 123,148 $ 292,066 $ 234,715 Selling, general and administrative expenses, as a percentage of revenues 8.8% 9.0% 8.6% 8.8% </TABLE> Our selling, general and administrative expenses for the three months ended June 30, 2008 increased $28.7 million to $151.8 million compared to $123.1 million for the three months ended June 30, 2007, primarily attributable to companies acquired during the last 12 months. Selling, general and administrative expenses as a percentage of revenues were 8.8% for the three months ended June 30, 2008, compared to 9.0% for the three months ended June 30, 2007. Selling, general and administrative expenses as a percentage of revenues were 8.6% for the six months ended June 30, 2008 compared to 8.8% for the six months ended June 30, 2007. For the first six months of 2008, compared to the first six months of 2007, selling, general and administrative expenses increased by $57.4 million, primarily attributable to companies acquired during the last 12 months. The increase for the six month period was partially offset by a $1.6 million reduction in expenses for the first six months of 2008, compared to the first six months of 2007, relating to a decrease in deferred compensation expense primarily due to a decrease in our liability corresponding with a reduction in the market price of our common stock during the 2008 period. The increase in selling, general and administrative expenses for the three and six months ended June 30, 2008, compared to the same periods in 2007, was also due in part to an increase in incentive-based compensation expense as a result of improved profits. Restructuring expenses Restructuring expenses, primarily related to employee severance obligations, were $0.06 million and $0.07 million for the three and six months ended June 30, 2008, respectively. Restructuring expenses were zero and $0.09 million for the three and six months ended June 30, 2007. As of June 30, 2008, we had no unpaid severance obligations.
Operating income The following table presents our operating income (loss), and operating income (loss) as a percentage of segment revenues from unrelated entities (in thousands, except for percentages): <TABLE> <CAPTION> For the three months ended June 30, ---------------------------------------------- % of % of Segment Segment 2008 Revenues 2007 Revenues -------- -------- -------- -------- Operating income (loss): <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 24,869 5.8% $ 21,179 6.2% United States mechanical construction and facilities services 25,298 4.0% 28,475 5.1% United States facilities services 35,080 8.7% 9,860 4.4% -------- -------- Total United States operations 85,247 5.8% 59,514 5.3% Canada construction and facilities services 3,155 3.3% 807 1.1% United Kingdom construction and facilities services 3,913 2.3% (2,178) -- Other international construction and facilities services -- -- (162) -- Corporate administration (18,928) -- (16,530) -- Restructuring expenses (57) -- -- -- -------- -------- Total worldwide operations 73,330 4.3% 41,451 3.0% Other corporate items: Interest expense (2,638) (549) Interest income 2,059 3,328 Minority interest (277) (711) -------- -------- Income from continuing operations before income taxes $ 72,474 $ 43,519 ======== ======== </TABLE> <TABLE> <CAPTION> For the six months ended June 30, ---------------------------------------------- % of % of Segment Segment 2008 Revenues 2007 Revenues -------- -------- -------- -------- Operating income (loss): <S> <C> <C> <C> <C> United States electrical construction and facilities services $ 42,085 5.1% $ 32,105 4.9% United States mechanical construction and facilities services 42,942 3.5% 41,827 3.9% United States facilities services 60,621 8.0% 17,494 4.0% -------- -------- Total United States operations 145,648 5.2% 91,426 4.2% Canada construction and facilities services 5,615 2.8% (392) -- United Kingdom construction and facilities services 6,038 1.7% (1,751) -- Other international construction and facilities services (596) -- (278) -- Corporate administration (33,635) -- (30,108) -- Restructuring expenses (71) -- (93) -- -------- -------- Total worldwide operations 122,999 3.6% 58,804 2.2% Other corporate items: Interest expense (6,625) (1,087) Interest income 5,192 6,577 Minority interest (353) (1,115) -------- -------- Income from continuing operations before income taxes $121,213 $ 63,179 ======== ======== </TABLE>
As described below in more detail, operating income increased by $31.9 million for the three months ended June 30, 2008 to $73.3 million compared to operating income of $41.5 million for the three months ended June 30, 2007. Operating income increased by $64.2 million for the six months ended June 30, 2008 to $123.0 million compared to $58.8 million for the six months ended June 30, 2007. Operating income as a percentage of revenues ("operating margin") increased to 4.3% for the three months ended June 30, 2008 compared to 3.0% for the three months ended June 30, 2007, and increased to 3.6% for the six months ended June 30, 2008 compared to 2.2% for the six months ended June 30, 2007. The improvement in operating margin was in large part due to an increase in operating income attributable to the industrial services and mobile mechanical services companies acquired during the last 12 months that are reported within our United States facilities services segment, as well as improved operating performance by our international businesses. United States electrical construction and facilities services operating income of $24.9 million for the three months ended June 30, 2008 increased $3.7 million compared to operating income of $21.2 million for the three months ended June 30, 2007. Operating income of $42.1 million for the six months ended June 30, 2008 increased $10.0 million compared to operating income of $32.1 million for the six months ended June 30, 2007. The increases in operating income during the three and six months ended June 30, 2008 compared to the same periods in 2007 were primarily the result of increased revenues from industrial and hospitality projects. Selling, general and administrative expenses were higher for the three and six months ended June 30, 2008 compared to the same periods in 2007 principally due to increased incentive-based compensation recorded due to improved earnings. United States mechanical construction and facilities services operating income for the three months ended June 30, 2008 was $25.3 million, a $3.2 million decrease compared to operating income of $28.5 million for the three months ended June 30, 2007. Operating income for the six months ended June 30, 2008 was $42.9 million, a $1.1 million improvement compared to operating income of $41.8 million for the six months ended June 30, 2007. Operating income generally increased during the three and six months ended June 30, 2008 compared to the prior year periods primarily due to (a) increased hospitality and industrial construction projects and (b) the addition of companies acquired during the last 12 months, which contributed $2.3 million and $4.5 million, respectively, to operating income, partially offset by a $7.9 million expense in connection with the UOSA Action. Selling, general and administrative expenses were higher primarily due to (a) employee incentive compensation recorded due to improved earnings and (b) companies acquired during the last 12 months. United States facilities services operating income for the three months ended June 30, 2008 was $35.1 million compared to operating income of $9.9 million for the three months ended June 30, 2007. Operating income for the six months ended June 30, 2008 was $60.6 million compared to operating income of $17.5 million for the six months ended June 30, 2007. The increases in operating income during the three and six months ended June 30, 2008 compared to the prior year periods were primarily due to (a) companies acquired during the last 12 months, which contributed $22.6 million and $40.9 million, respectively, of the increases in operating income, and were primarily attributable to companies that perform industrial facilities services and (b) increased income from services performed by our mobile mechanical and commercial site-based services operations. As a result of acquisitions, amortization expense increased by $4.1 million during the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Amortization expense increased by $8.4 million during the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Selling, general and administrative expenses increased by $15.7 million and $31.4 million for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007, respectively, primarily due to companies acquired during the last 12 months. Our Canada construction and facilities services operating income was $3.2 million for the three months ended June 30, 2008, compared to operating income of $0.8 million for the three months ended June 30, 2007. This segment's operating income was $5.6 million for the six months ended June 30, 2008 compared to an operating loss of $0.4 million for the six months ended June 30, 2007. Included in the operating loss for the six months ended June 30, 2007 was a $1.4 million gain on sale of property. The operating income improvement for the three and six months ended June 30, 2008 compared to the same periods in 2007 was related to increased revenues mostly attributable to automotive, healthcare and power generation projects that resulted in higher gross margins.
Our United Kingdom construction and facilities services operating income for the three months ended June 30, 2008 was $3.9 million compared to an operating loss of $2.2 million for the three months ended June 30, 2007. This segment's operating income was $6.0 million for the six months ended June 30, 2008 compared to an operating loss of $1.8 million for the six months ended June 30, 2007. The improvement in operating income was primarily attributable to the completion in 2007 of certain projects of the rail division in connection with which we incurred losses during the three and six months ended June 30, 2007. Other international construction and facilities services operating income was breakeven for the three months ended June 30, 2008 compared to an operating loss of $0.2 million for the three months ended June 30, 2007. This segment's operating loss was $0.6 million for the six months ended June 30, 2008 compared to an operating loss of $0.3 million for the six months ended June 30, 2007. Corporate administration expense for the three months ended June 30, 2008 was $18.9 million compared to $16.5 million for the three months ended June 30, 2007. Corporate administrative expense for the six months ended June 30, 2008 was $33.6 million compared to $30.1 million for the six months ended June 30, 2007. This increase in expenses was primarily due to increased compensation expense, as well as corporate initiatives supporting recruiting and marketing programs. Interest expense for the three months ended June 30, 2008 and 2007 was $2.6 million and $0.5 million, respectively. Interest expense for the six months ended June 30, 2008 and 2007 was $6.6 million and $1.1 million, respectively. The increase in interest expense was primarily due to interest and debt issuance cost amortization relating to our Term Loan incurred in September 2007 to finance the Ohmstede acquisition. On March 31, 2008, we made a prepayment of indebtedness under the Term Loan of $24.25 million, which resulted in our recording as interest expense accelerated amortization expense related to capitalized debt issuance costs of $0.3 million for the six months ended June 30, 2008. Interest income for the three months ended June 30, 2008 was $2.1 million compared to $3.3 million for the three months ended June 30, 2007. Interest income for the six months ended June 30, 2008 was $5.2 million compared to $6.6 million for the six months ended June 30, 2007. The decrease was primarily related to less cash available in 2008 to invest. For the three months ended June 30, 2008 and 2007, our income tax provision was $28.5 million and $18.2 million, respectively, based on effective income tax rates of 39% and 42%, respectively. For the six months ended June 30, 2008 and 2007, our income tax provision was $47.9 million and $26.3 million, respectively, based on effective income tax rates of 40% and 42%, respectively. Liquidity and Capital Resources The following table presents our net cash provided by (used in) operating activities, investing activities and financing activities (in thousands): <TABLE> <CAPTION> For the six months ended June 30, --------------------------------- 2008 2007 -------- -------- <S> <C> <C> Net cash provided by operating activities $110,750 $ 62,293 Net cash used in investing activities $(61,112) $(13,090) Net cash (used in) provided by financing activities $(25,507) $ 11,418 Effect of exchange rate changes on cash and cash equivalents $ (257) $ 1,979 </TABLE> Our consolidated cash balance increased by approximately $23.9 million from $251.6 million at December 31, 2007 to $275.5 million at June 30, 2008. The $110.8 million in net cash provided by operating activities for the six months ended June 30, 2008, which increased $48.5 million when compared to $62.3 million in net cash provided by operating activities for the six months ended June 30, 2007, was primarily due to an increase in net income. Net cash used in investing activities of $61.1 million for the six months ended June 30, 2008 increased $48.0 million compared to $13.1 million used in the six months ended June 30, 2007 and was primarily due to a $40.1 million increase in payments for acquisitions of businesses, identifiable intangible assets and payments pursuant to related earn-out agreements, a $6.2 million increase in amounts paid for the purchase of property, plant and equipment and a $1.8 million decrease in proceeds from the sale of property, plant and equipment, partially offset by a $0.2 million decrease in investment in and advances to unconsolidated entities and joint ventures. Net cash used in financing activities of $25.5 million for the six months ended June 30, 2008 increased $36.9 million compared to net cash provided by financing activities of $11.4 million for the six months ended June 30, 2007 and was primarily attributable to $26.6 million in repayments of long-term debt, a $4.9 million decrease in proceeds from exercise of stock options and a $5.5 million decrease in excess tax benefits from share-based compensation.
The following is a summary of material contractual obligations and other commercial commitments (in millions): <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> Term Loan $ 199.3 $ 3.0 $196.3 $ -- $ -- Other long-term debt 0.1 0.1 -- -- -- Capital lease obligations 2.1 0.8 1.0 0.2 0.1 Operating leases 223.4 53.2 84.3 44.9 41.0 Open purchase obligations (1) 966.3 799.3 158.0 9.0 -- Other long-term obligations (2) 248.3 27.6 198.9 21.8 -- Liabilities related to uncertain income tax positions 13.2 3.4 9.8 -- -- -------- ------ ------ ------ ------ Total Contractual Obligations $1,652.7 $887.4 $648.3 $ 75.9 $ 41.1 ======== ====== ====== ====== ====== </TABLE> <TABLE> <CAPTION> Amount of Commitment Expiration by Period ----------------------------------------- Less Other Commercial Total than 1-3 4-5 After Commitments Committed 1 year years years 5 years - ----------------------------------------------------- --------- ------ ------ ------ ------- <S> <C> <C> <C> <C> <C> <C> Revolving Credit Facility (3) $ -- $ -- $ -- $ -- $ -- Letters of credit 61.0 -- 61.0 -- -- Guarantees 25.0 -- -- -- 25.0 -------- ------ ------ ------ ------- Total Commercial Obligations $ 86.0 $ -- $ 61.0 $ -- $ 25.0 ======== ====== ====== ====== ======= </TABLE> (1) Represents open purchase orders for material and subcontracting costs related to construction and service contracts. These purchase orders are not reflected in EMCOR's condensed consolidated balance sheets and should not impact future cash flows, as amounts will be recovered through customer billings. (2) Represents primarily insurance related liabilities, a pension plan liability and liabilities for unrecognized income tax benefits, classified as other long-term liabilities in the condensed consolidated balance sheets. Cash payments for insurance related liabilities may be payable beyond three years, but it is not practical to estimate these payments. We provide funding to our pension plans based on at least the minimum funding required by applicable regulations. In determining the minimum required funding, we utilize current actuarial assumptions and exchange rates to forecast estimates of amounts that may be payable for up to five years in the future. In our judgment, minimum funding estimates beyond a five year time horizon cannot be reliably estimated, and, therefore, have not been included in the table. (3) We classify these borrowings as short-term on our condensed consolidated balance sheets because of our intent and ability to repay the amounts on a short-term basis. As of June 30, 2008, there were no borrowings outstanding under the Revolving Credit Facility. Our revolving credit agreement (the "Revolving Credit Facility") provides for a credit facility of $375.0 million. As of June 30, 2008 and December 31, 2007, we had approximately $61.0 million and $53.8 million of letters of credit outstanding, respectively, under the Revolving Credit Facility. There were no borrowings under the Revolving Credit Facility as of June 30, 2008 and December 31, 2007. On September 19, 2007, we entered into an agreement providing for a $300.0 million Term Loan. The proceeds were used to pay a portion of the consideration for the acquisition of Ohmstede and costs and expenses incident thereto. The Term Loan contains covenants, representations and warranties and events of default. The Term Loan covenants require, among other things, maintenance of certain financial ratios and contain certain restrictions with respect to payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. We are required to make principal payments on the Term Loan in installments on the last day of March, June, September and December of each year, commencing March 2008 in the amount of $0.75 million, together with interest on the then outstanding principal amount. A final payment comprised of all remaining principal and interest is due on October 17, 2010. The Term Loan is secured by substantially all of our assets and substantially all of the assets of substantially all of our U.S. subsidiaries. The Term Loan bears interest at (1) the prime commercial lending rate announced by Bank of Montreal from time to time (5.00% at June 30, 2008) plus 0.0% to 0.5% based on certain financial tests or (2) U.S. dollar LIBOR (2.46% at June 30, 2008) plus 1.0% to 2.25% based on certain financial tests. The interest rate in effect at June 30, 2008 was 3.46%. Since September 19, 2007, we have made prepayments of $99.25 million, and mandatory payments of $1.5 million, to reduce the balance of the Term Loan to $199.25 million at June 30, 2008.
One of our subsidiaries has guaranteed $25.0 million of borrowings by a joint venture in which we have 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 in borrowings. The terms of our construction contracts frequently require that we obtain from surety companies ("Surety Companies") and provide to our customers payment and performance bonds ("Surety Bonds") as a condition to the award of such contracts. The Surety Bonds secure our payment and performance obligations under such contracts, and we have agreed to indemnify the Surety Companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. In addition, at the request of labor unions representing certain of our employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, our bonding requirements typically increase as the amount of public sector work increases. As of June 30, 2008, based on our percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, had there been defaults on all our existing contractual obligations, would have been approximately $1.5 billion. The Surety Bonds are issued by Surety Companies in return for premiums, which vary depending on the size and type of bond. In recent years, there has been a reduction in the aggregate surety bond issuance capacity of Surety Companies due to industry consolidations and significant losses of Surety Companies as a result of providing Surety Bonds to construction companies, as well as companies in other industries. Consequently, the availability of Surety Bonds has become more limited and the terms upon which Surety Bonds are available have become more restrictive. We continually monitor our available limits of Surety Bonds and discuss with our current and other Surety Bond providers the amount of Surety Bonds that may be available to us based on our financial strength and the absence of any default by us on any Surety Bond we have previously obtained. However, if we experience changes in our bonding relationships or if there are further changes in the surety industry, we may seek to satisfy certain customer requests for Surety Bonds by posting other forms of collateral in lieu of Surety Bonds such as letters of credit or guarantees by EMCOR Group, Inc., by seeking to convince customers to forego the requirement for Surety Bonds, by increasing our activities in business segments that rarely require Surety Bonds such as the facilities services segment, and/or by refraining from bidding for certain projects that require Surety Bonds. There can be no assurance that we will be able to effectuate alternatives to providing Surety Bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require Surety Bonds to replace projects requiring Surety Bonds that we may decline to pursue. Accordingly, if we were to experience a reduction in the availability of Surety Bonds, we could experience a material adverse effect on our financial position, results of operations and/or cash flow. We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed above. Our primary source of liquidity has been, and is expected to continue to be, cash generated by operating activities. We also maintain our 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 issuance of other debt instruments. Short-term changes in macroeconomic trends may have an effect, positively or negatively, on liquidity. In addition to managing borrowings, our focus on the facilities services market is intended to provide an additional buffer against economic downturns inasmuch as much of our facilities services business is characterized by annual and multi-year contracts that provide a more predictable stream of cash flow than the construction business. Short-term liquidity is also impacted by the type and length of construction contracts in place. During economic downturns, such as the downturn that we experienced from 2001 through 2004 in the commercial construction industry, there were typically fewer small discretionary projects from the private sector, and companies like us 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; however, we have been successful during the 2007 and 2008 periods of strong demand for non-residential construction services to substantially increase our net over-billed position. 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 $527.6 million and $427.5 million as of June 30, 2008 and December 31, 2007, respectively.
Long-term liquidity requirements can be expected to be met through cash generated from operating activities, our Revolving Credit Facility and, if required, 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 (a) to incur long-term debt to fund acquisitions and/or (b) to issue 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. Also, critical to meeting long-term liquidity requirements is our ability to perform work at profitable levels. We believe that current cash balances and 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 short-term and foreseeable long-term liquidity and 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 $78.0 million. If we were required to pay damages in one or more such proceedings, such payments could have a material adverse effect on our financial position, results of operations and/or cash flows. Certain Insurance Matters As of June 30, 2008 and December 31, 2007, we utilized approximately $54.5 million and $48.2 million, respectively, of letters of credit obtained under our Revolving Credit Facility as collateral for our insurance obligations. New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement No. 157, "Fair Value Measurements" ("Statement 157"). Statement 157 provides guidance for using fair value to measure assets and liabilities. The statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances. Statement 157 was effective for our financial statements beginning with the first quarter of 2008. The adoption of Statement 157 did not affect our financial position or the results of operations. However, on February 12, 2008, the FASB issued FASB Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP") that amends Statement 157 to delay the effective date for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). The FSP defers the effective date of Statement 157 to fiscal years beginning after November 15, 2008. We have not determined the effect, if any, the adoption of the FSP will have on our financial position and results of operations. However, we believe we would likely be required to provide additional disclosures in future financial statements beginning after the effective date of the new standard. In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" ("Statement 159"). Statement 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Statement 159 was effective for our financial statements beginning with the first quarter of 2008. We have elected not to account for any additional financial instruments or other items at fair value pursuant to Statement 159. In December 2007, the FASB issued Statement No. 141 (revised 2007), "Business Combinations" ("Statement 141(R)"). Statement 141(R) changes the accounting for acquisitions specifically eliminating the step acquisition model, changing the recognition of contingent consideration from being recognized when it is probable to being recognized at the time of acquisition, disallowing the capitalization of transaction costs and changes when restructurings related to acquisitions can be recognized. The standard is effective for fiscal years beginning on or after December 15, 2008 and will only impact the accounting for acqusitions that are made after adoption. In December 2007, the FASB issued Statement No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("Statement 160"). This statement is effective for fiscal years beginning on or after December 15, 2008, with earlier adoption prohibited. This statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from our equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. It also amends certain of ARB No. 51's consolidation procedures for consistency with the requirements of Statement 141(R). This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. We have not determined the effect, if any, the adoption of Statement 160 will have on our financial position and results of operations.
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 8 of the annual report on Form 10-K for the year ended December 31, 2007. There was no initial adoption of any accounting policies during the six months ended June 30, 2008, except for the adoption of Statement 157 and Statement 159. 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) goodwill and 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 fully 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 condensed consolidated balance sheets. Costs and estimated earnings in excess of billings on uncompleted contracts reflected in the condensed 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 performed 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 facilities 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 likelihood of realization of receivables. Relevant assessment factors include the creditworthiness of the customer, our prior collection history with the customer and related aging of the past due balances. The provision for bad debts during the six months ended June 30, 2008 increased $0.3 million compared to the six months ended June 30, 2007. At June 30, 2008 and December 31, 2007, accounts receivable of $1,496.4 million and $1,435.3 million, respectively, included allowances of $26.3 million and $27.0 million, respectively. Specific accounts receivable are evaluated when we believe a customer may not be able to meet its financial obligations due to deterioration of its financial condition or its credit ratings. The allowance requirements are based on the best facts available and are re-evaluated and adjusted on a regular basis and as additional information is received. Insurance Liabilities We have loss payment 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 our liability for claims incurred and for claims incurred but not reported. The liabilities are derived from known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate of these obligations. We believe the liabilities recognized on our balance sheets for these obligations are adequate. However, such obligations are difficult to assess and estimate due to numerous factors, including severity of injury, determination of liability in proportion to other parties, timely reporting of occurrences and effectiveness of safety and risk management programs. Therefore, if actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and will be recorded in the period that the experience becomes known. Income Taxes We have net deferred tax liabilities primarily resulting from deductible temporary differences of $13.6 million and $25.0 million at June 30, 2008 and December 31, 2007, respectively, which will increase our taxable income in future periods. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. As of June 30, 2008 and December 31, 2007, the total valuation allowance was approximately $8.4 million and $8.6 million, respectively. Goodwill and Intangible Assets As of June 30, 2008, we had $569.3 million and $271.3 million, respectively, of goodwill and net identifiable intangible assets (primarily based on the market values of our contract backlog, developed technology, customer relationships, non-competition agreements and trade names), primarily arising out of the acquisition of companies. As of December 31, 2007, goodwill and net identifiable intangible assets were $563.9 million and $252.1 million, respectively. The increases in the goodwill and net identifiable intangible assets (net of accumulated amortization) since December 31, 2007 were related to the acquisition of three companies during the first six months of 2008, pending completion of final valuation and purchase price adjustments. In addition, goodwill increased due to an estimated earn-out payment related to a prior year acquisition. 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 and other intangible assets with indefinite useful lives not be amortized, but instead must be tested at least annually for impairment (which we test each October 1), and be written down if impaired, rather than amortized as previous standards required. Furthermore, Statement 142 requires that identifiable intangible assets with finite lives be amortized over their useful lives. Changes in strategy and/or market conditions may result in adjustments to recorded intangible asset balances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As of June 30, 2008, we did not have any derivative instruments. We did not use any material derivative financial instruments during the six months ended June 30, 2007, 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 and the Term Loan. Borrowings under the Revolving Credit Facility and the Term Loan bear interest at variable rates, and the fair value of borrowings are not affected by changes in market interest rates. As of June 30, 2008, there were no borrowings outstanding under the Revolving Credit Facility and the balance on the Term Loan was $199.25 million. Both instruments bear interest at (1) a rate which is the prime commercial lending rate announced by Bank of Montreal from time to time (5.00% at June 30, 2008) plus 0.0% to 0.5% based on certain financial tests or (2) United States dollar LIBOR (2.46% at June 30, 2008) plus 1.0% to 2.25% based on certain financial tests. The interest rates in effect at June 30, 2008 were 5.00% and 3.46% for the prime commercial lending rate and the United States dollar LIBOR, respectively. Letter of credit fees issued under the Revolving Credit Facility range from 1.0% 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 and the Term Loan expire in October 2010. There is no guarantee that we will be able to renew the Revolving Credit Facility at its expiration. Based on the $199.25 million borrowings outstanding on the Term Loan, if the overall interest rates were to increase by 1.0%, the net of tax interest expense would increase approximately $1.2 million in the next twelve months. Conversely, if the overall interest rates were to decrease by 1.0%, interest expense, net of income taxes, would decrease by approximately $1.2 million in the next twelve months. We are also exposed to construction market risk and its potential related impact on accounts receivable or costs and estimated earnings in excess of billings on uncompleted contracts. The amounts recorded may be at risk if our customers' ability to pay these obligations is negatively impacted by economic conditions. We continually monitor the creditworthiness of our customers and maintain on-going discussions with customers regarding contract status with respect to change orders and billing terms. Therefore, we believe we take appropriate action to manage market and other risks, but there is no assurance that we will be able to reasonably identify all risks with respect to collectibility of these assets. See also the previous discussion of Accounts Receivable under the heading, "Application of Critical Accounting Policies" in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Amounts invested in our foreign operations are translated into U.S. dollars at the exchange rates in effect at the end of the period. The resulting translation adjustments are recorded as accumulated other comprehensive income (loss), a component of stockholders' equity, in our 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, which are used as components of supplies or materials utilized in both our construction and facilities services operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our fleet of over 7,500 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 of Directors and Chief Executive Officer, Frank T. MacInnis, and our Executive Vice President and Chief Financial Officer, Mark A. Pompa, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchanges Act of 1934) are effective as of the end of the period covered by this report. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended June 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. - OTHER INFORMATION. ITEM 1. LEGAL PROCEEDINGS. Except as indicated below, there have been no material developments during the quarter ended June 30, 2008 regarding legal proceedings reported in our Annual Report on Form 10-K for the year ended December 31, 2007 or in our Form 10-Q for the quarter ended March 31, 2008. In connection with a project (the "Project") for the construction in Virginia of a wastewater treatment facility for the Upper Occoquan Sewage Authority ("UOSA"), in which our subsidiary Poole & Kent Corporation participated as a co-venturer with an unrelated party (the "Joint Venture"), the Joint Venture in 2000 commenced a civil action in the Fairfax, Virginia Circuit Court (the "Court") against UOSA alleging material breaches of the construction contract (the "Contract") for the Project. As previously reported, as a result of a jury verdict in March 2005 in that action and a subsequent ruling in June 2005 of the trial judge in the action, it was determined that the Joint Venture was entitled to be paid approximately $17.0 million by UOSA, which amount was in addition to that which the Joint Venture had already received from UOSA. In June 2005, the trial judge ordered that related claims asserted by the Joint Venture against UOSA for breach of the Contract and for recovery of amounts withheld by UOSA in respect to payments owing to the Joint Venture under the Contract should be pursued in a separate trial. UOSA subsequently filed a claim, pursuant to a Virginia statute, for recovery of most of its attorneys' fees associated with that pending trial. All of these claims have been tried before a jury, which, in May 2008, rendered a verdict resulting in a net award to UOSA of approximately $1.3 million, of which approximately one-half is payable by the Company. On July 14, 2008, the Joint Venture filed a motion requesting (a) that, notwithstanding the verdict, the trial judge award it amounts relating to certain of the Joint Venture's claims and vacate the award to UOSA of its claim for attorneys' fees, or, in the alternative, set aside the verdict with respect to those claims and the award to UOSA and order a new trial with respect to such matters and (b) that the rest of the verdict be set aside and a new trial be held with respect to the claims as to which such portion of the verdict related. There is no assurance that the trial judge will grant any of these motions requested by the Joint Venture. On the assumption that the jury verdict will be upheld in its entirety, we recorded in our results for the quarter ended June 30, 2008 an expense of approximately $7.9 million. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The annual meeting of stockholders of EMCOR (the "Annual Meeting") was held on June 18, 2008. (b) The Board of Directors of EMCOR consists of eight individuals each of whom was nominated at the Annual Meeting for re-election as a director of EMCOR for the ensuing year. Each director was re-elected. (c) Set forth below are the names of each director elected at the Annual Meeting, the number of shares voted for his re-election and the number of votes withheld from his re-election. There were no broker non-votes. Name Votes For Votes Withheld - ---------------------- ---------------------- ---------------------- Stephen W. Bershad 55,327,465 1,285,090 David A. B. Brown 55,742,317 870,238 Larry J. Bump 55,461,858 1,150,697 Albert Fried, Jr. 55,259,282 1,353,273 Richard F. Hamm, Jr. 55,880,460 732,095 Frank T. MacInnis 55,091,453 1,521,102 Jerry E. Ryan 55,947,393 665,162 Michael T. Yonker 55,395,175 1,217,380 At the Annual Meeting, stockholders also voted upon a proposal to re-approve adoption by the Board of Directors of the Company's Key Executive Incentive Bonus Plan, described in the proxy statement for the Annual Meeting. 48,587,310 shares voted in favor of approval, 3,866,529 voted against approval, and 30,038 shares abstained from voting thereon. There were 4,128,678 broker non-votes.
In addition, at the Annual Meeting, stockholders voted upon a proposal to approve adoption by the Board of Directors of the EMCOR Group, Inc. Employee Stock Purchase Plan, described in the proxy statement for the Annual Meeting. 48,652,991 shares voted in favor of approval, 3,815,719 voted against approval, and 15,167 shares abstained from voting thereon. There were 4,128,678 broker non-votes. Also at the Annual Meeting, the stockholders voted upon a proposal to ratify the appointment by the Audit Committee of the Company's Board of Directors of Ernst & Young LLP, independent auditors, as EMCOR's independent auditors for 2008. 56,521,433 shares voted in favor of ratification, 61,510 shares voted against ratification and 29,612 shares abstained from voting thereon. There were no broker non-votes.
ITEM 6. EXHIBITS. <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- <S> <C> <C> 2(a-1) Purchase Agreement dated as of February 11, 2002 by Exhibit 2.1 to EMCOR Group, Inc.'s and among Comfort Systems USA, Inc. and EMCOR-CSI ("EMCOR") Report on Form 8-K dated Holding Co. February 14, 2002 2(a-2) Purchase and Sale Agreement dated as of August 20, Exhibit 2.1 to EMCOR's Report on Form 8-K 2007 between FR X Ohmstede Holdings LLC and EMCOR (Date of Report August 20, 2007) Group, Inc. 3(a-1) Restated Certificate of Incorporation of EMCOR filed Exhibit 3(a-5) to EMCOR's Registration December 15, 1994 Statement on Form 10 as originally filed March 17, 1995 ("Form 10") 3(a-2) Amendment dated November 28, 1995 to the Restated Exhibit 3(a-2) to EMCOR's Annual Report on Certificate of Incorporation of EMCOR Form 10-K for the year ended December 31, 1995 ("1995 Form 10-K") 3(a-3) Amendment dated February 12, 1998 to the Restated Exhibit 3(a-3) to EMCOR's Annual Report on Certificate of Incorporation 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 on Certificate of Incorporation Form 10-K for the year ended December 31, 2005 ("2005 Form 10-K") 3(a-5) Amendment dated September 18, 2007 to the Restated Exhibit A to EMCOR's Proxy Statement dated Certificate of Incorporation August 17, 2007 for Special Meeting of Stockholder's held September 18, 2007 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") 4(a) U.S. $375,000,000 (originally U.S. $350,000,000)Credit Exhibit 4 to EMCOR's Report on Form 8-K Agreement dated October 14, 2005 by and among (Date of Report October 17, 2005) EMCOR Group, Inc. and certain of its 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 4(c) Commitment Amount Increase Request dated November Exhibit 4(c) to 2005 Form 10-K 21, 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 Exhibit 4(d) to 2005 Form 10-K 21, 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 Exhibit 4(e) to 2005 Form 10-K 21, 2005 between EMCOR and National City Bank of Indiana effective November 29, 2005 pursuant to Section 1.10 of the Credit Agreement </TABLE>
ITEM 6. EXHIBITS. - (continued) <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- <S> <C> <C> 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 4(h) Term Loan Agreement dated as of September 19, 2007 Exhibit 4.1(a) to EMCOR's Form 8-K (Date among EMCOR, Bank of Montreal, as Administrative Agent, of Report September 19, 2007) and the several financial institutions listed on the signature pages thereof 4(i) Second Amended and Restated Security Agreement dated Exhibit 4.1(b) to EMCOR's Form 8-K (Date as of September 19, 2007 among EMCOR, certain of its of Report September 19, 2007) U.S. subsidiaries, and Harris N.A., as Agent 4(j) Second Amended and Restated Pledge Agreement dated as Exhibit 4.1(c) to EMCOR's Form 8-K (Date of September 19, 2007 among EMCOR, certain of its U.S. of Report September 19, 2007) subsidiaries, and Harris N.A., as Agent 4(k) Guaranty Agreement by certain of EMCOR's U.S. Exhibit 4.1(d) to EMCOR's Form 8-K (Date subsidiaries in favor of Harris N.A., as Agent of Report September 19, 2007) 4(l) First Amendment dated as of September 19, 2007 to Exhibit 4.1(e) to EMCOR's Form 8-K (Date Amended and Restated Credit Agreement effective of Report September 19, 2007) October 14, 2005 among EMCOR, Harris N.A., as Agent, and certain other lenders party thereto 10(a) Severance Agreement between EMCOR and Frank T. Exhibit 10.2 to EMCOR's Report on Form MacInnis 8-K (Date of Report April 25, 2005) ("April 2005 Form 8-K") 10(b) Form of Severance Agreement ("Severance Agreement") Exhibit 10.1 to the April 2005 Form 8-K between EMCOR and each of Sheldon I. Cammaker, R. Kevin Matz and Mark A. Pompa 10(c) Form of Amendment to Severance Agreement between Exhibit 10(c) to EMCOR's Quarterly Report EMCOR and each of Frank T. MacInnis, Sheldon I. on Form 10-Q for the quarter ended March Cammaker, R. Kevin Matz and Mark A. Pompa 31, 2007 ("March 2007 Form 10-Q") 10(d) Letter Agreement dated October 12, 2004 between Exhibit 10.1 to EMCOR's Report on Form Anthony Guzzi and EMCOR (the "Guzzi Letter 8-K (Date of Report October 12, 2004) Agreement") 10(e) Form of Confidentiality Agreement between Anthony Exhibit C to Guzzi Letter Agreement Guzzi and EMCOR 10(f) Form of Indemnification Agreement between EMCOR and Exhibit F to Guzzi Letter Agreement each of its officers and directors 10(g-1) Severance Agreement ("Guzzi Severance Agreement") Exhibit D to the Guzzi Letter Agreement dated October 25, 2004 between Anthony Guzzi and EMCOR 10(g-2) Amendment to Guzzi Severance Agreement Exhibit 10(g-2) to the March 2007 Form 10-Q 10(h-1) 1994 Management Stock Option Plan ("1994 Option Exhibit 10(o) to Form 10 Plan") </TABLE>
ITEM 6. EXHIBITS. - (continued) <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- <S> <C> <C> 10(h-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, 2000 ("2000 Form 10-K") 10(h-3) Amendment to Section 13 of the 1994 Option Plan Exhibit (g-3) to 2000 Form 10-K 10(i-1) 1995 Non-Employee Directors' Non-Qualified Stock Exhibit 10(p) to Form 10 Option Plan ("1995 Option Plan") 10(i-2) Amendment to Section 10 of the 1995 Option Plan Exhibit (h-2) to 2000 Form 10-K 10(j-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(j-2) Amendment to Section 9 of the 1997 Option Plan Exhibit 10(i-2) to 2000 Form 10-K 10(k) 1997 Stock Plan for Directors Exhibit 10(1) to 1999 Form 10-K 10(l-1) Continuity Agreement dated as of June 22, 1998 Exhibit 10(a) to EMCOR's Quarterly Report between Frank T. MacInnis and EMCOR ("MacInnis on Form 10-Q for the quarter ended June Continuity Agreement") 30, 1998 ("June 1998 Form 10-Q") 10(l-2) Amendment dated as of May 4, 1999 to MacInnis Exhibit 10(h) to EMCOR's Quarterly Report Continuity Agreement on Form 10-Q for the quarter ended June 30, 1999 ("June 1999 Form 10-Q") 10(l-3) Amendment dated as of March 1, 2007 to MacInnis Exhibit 10(l-3) to the March 2007 Form 10-Q Continuity Agreement 10(m-1) Continuity Agreement dated as of June 22, 1998 Exhibit 10(c) to the June 1998 Form 10-Q between Sheldon I. Cammaker and EMCOR ("Cammaker Continuity Agreement") 10(m-2) Amendment dated as of May 4, 1999 to Cammaker Exhibit 10(i) to the June 1999 Form 10-Q Continuity Agreement 10(m-3) Amendment dated as of March 1, 2007 to Cammaker Exhibit 10(m-3) to the March 2007 Form Continuity Agreement 10-Q 10(n-1) Continuity Agreement dated as of June 22, 1998 Exhibit 10(f) to the June 1998 Form 10-Q between 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 EMCOR's Quarterly Report Continuity Agreement on Form 10-Q for the quarter ended March 31, 2002 ("March 2002 Form 10-Q") 10(n-4) Amendment dated as of March 1, 2007 to Matz Continuity Exhibit 10(n-4) to the March 2007 Form 10-Q Agreement 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 </TABLE>
ITEM 6. EXHIBITS. - (continued) <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- <S> <C> <C> 10(o-4) Amendment dated as of March 1, 2007 to Pompa Continuity Exhibit 10(o-4) to the March 2007 Form 10-Q Agreement 10(p-1) Change of Control Agreement dated as of October 25, Exhibit E to Guzzi Letter Agreement 2004 between Anthony Guzzi ("Guzzi") and EMCOR ("Guzzi Continuity Agreement") 10(p-2) Amendment dated as of March 1, 2007 to Guzzi Exhibit 10(p-2) to the March 2007 Form Continuity Agreement 10-Q 10(q-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 of February 18, 2004 ("2004 Form S-8") 10(q-2) Amendment to Executive Stock Bonus Plan Exhibit 10(s-2) to the March 2007 Form 10-Q 10(q-3) Form of Certificate Representing Restrictive Stock Exhibit 10.1 to EMCOR's Report on Form 8-K Units ("RSU's") issued under the Stock Bonus Plan (Date of Report March 4, 2005)("March 4, Manditorily Awarded 2005 Form 8-K") 10(q-4) Form of Certificate Representing RSU's issued under Exhibit 10.2 to March 4, 2005 Form 8-K the Stock Bonus Plan Voluntarily Awarded 10(r) Incentive Plan for Senior Executive Officers of EMCOR Exhibit 10.3 to March 4, 2005 Form 8-K Group, Inc. ("Incentive Plan for Senior Executives") 10(s-1) First Amendment to Incentive Plan for Senior Exhibit 10(t) to 2005 Form 10-K Executives 10(s-2) Second Amendment to Incentive Plan for Senior Exhibit 10.1 to EMCOR's Report on Form 8-K Executives (Date of Report March 26, 2008) 10(t-1) EMCOR Group, Inc. Long-Term Incentive Plan ("LTIP") Exhibit 10 to Form 8-K (Date of Report December 15, 2005) 10(t-2) Form of Certificate Representing Stock Units issued Exhibit 10(t-2) to EMCOR's Annual Report under LTIP on Form 10-K for the year ended December 31, 2007 ("2007 Form 10-K") 10(u-1) 2003 Non-Employee Directors' Stock Option Plan Exhibit A to EMCOR's Proxy Statement for its Annual Meeting held on June 12, 2003 ("2003 Proxy Statement") 10(u-2) First Amendment to 2003 Non-Employee Director Plan Exhibit 10(u-2) to EMCOR's Annual Report on Form 10-K for the year ended December 31, 2006 ("2006 Form 10-K") 10(v-1) 2003 Management Stock Incentive Plan Exhibit B to EMCOR's 2003 Proxy Statement 10(v-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(v-3) Second Amendment to 2003 Management Stock Incentive Exhibit 10(v-3) to 2006 Form 10-K Plan 10(w) Form of Stock Option Agreement evidencing grant of Exhibit 10.1 to Form 8-K (Date of Report stock options under the 2003 Management Stock January 5, 2005) Incentive Plan 10(x) Key Executive Incentive Bonus Plan Exhibit B to EMCOR's Proxy Statement for its Annual Meeting held June 16, 2005 ("2005 Proxy Statement") </TABLE>
ITEM 6. EXHIBITS. - (continued) <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- <S> <C> <C> 10(y) 2005 Management Stock Incentive Plan Exhibit B to EMCOR's 2005 Proxy Statement 10(z) First Amendment to 2005 Management Stock Incentive Exhibit 10(z) to 2006 Form 10-K Plan 10(a)(a-1) 2005 Stock Plan for Directors Exhibit C to 2005 Proxy Statement 10(a)(a-2) First Amendment to 2005 Stock Plan for Directors Exhibit 10(a)(a-2) to 2006 Form 10-K 10(b)(b) Option Agreement between EMCOR and Frank T. MacInnis Exhibit 4.4 to 2004 Form S-8 dated May 5, 1999 10(c)(c) 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(d)(d) Form of EMCOR Option Agreement for Executive Exhibit 4.6 to 2004 Form S-8 Officers granted December 1, 2001 10(e)(e) Form of EMCOR Option Agreement for Executive Exhibit 4.7 to 2004 Form S-8 Officers granted January 2, 2002, January 2, 2003 and January 2, 2004 10(f)(f) 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(g)(g) Form of EMCOR Option Agreement for Executive Exhibit 10(g)(g) to 2005 Form 10-K Officers and Guzzi dated January 3, 2005 10(h)(h-1) 2007 Incentive Plan Exhibit B to EMCOR's Proxy Statement for its Annual Meeting held June 20, 2007 10(h)(h-2) Option agreement dated December 13, 2007 under 2007 Exhibit 10(h)(h-2) to 2007 Form 10-K Incentive Plan between Jerry E. Ryan and EMCOR 10(h)(h-3) Form of Option Agreement under 2007 Incentive Plan Exhibit 10(h)(h-3) to 2007 Form 10-K between EMCOR and each non-employee director electing to receive options as part of annual retainer 10(i)(i) 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 10(j)(j-1) Certificate dated March 24, 2008 evidencing Phantom Exhibit 10(j)(j-1) to EMCOR's Quarterly Stock Unit Award to Frank T. MacInnis Report on Form 10-Q for the quarter ended March 31, 2008 ("March 2008 Form 10-Q") 10(j)(j-2) Certificate dated March 24, 2008 evidencing Phantom Exhibit 10(j)(j-2) to the March 2008 Form Stock Unit Award to Anthony J. Guzzi 10-Q 10(k)(k) Certificate dated March 24, 2008 evidencing Stock Exhibit 10(k)(k) to the March 2008 Form Unit Award to Frank T. MacInnis 10-Q 10(l)(l) EMCOR Group, Inc. Employee Stock Purchase Plan Exhibit C to EMCOR's Proxy Statement for its Annual Meeting held June 18, 2008 </TABLE>
ITEM 6. EXHIBITS. - (continued) <TABLE> <CAPTION> Exhibit Incorporated By Reference to or No. Description Page Number - ----------- -------------------------------------------------------- ------------------------------------------- <S> <C> <C> 11 Computation of Basic EPS and Diluted EPS for the Note E of the Notes to the Condensed three and six months ended June 30, 2008 and 2007 Consolidated Financial Statements 31.1 Certification Pursuant to Section 302 of the Page _____ Sarbanes-Oxley Act of 2002 by the Chairman of the Board of Directors and Chief Executive Officer * 31.2 Certification Pursuant to Section 302 of the Page _____ Sarbanes-Oxley Act of 2002 by the Executive Vice President and Chief Financial Officer * 32.1 Certification Pursuant to Section 906 of the Page _____ Sarbanes-Oxley Act of 2002 by the Chairman of the Board of Directors and Chief Executive Officer ** 32.2 Certification Pursuant to Section 906 of the Page _____ Sarbanes-Oxley Act of 2002 by the Executive Vice President and Chief Financial Officer ** </TABLE> - --------------- * Filed Herewith ** Furnished Herewith
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: July 29, 2008 EMCOR GROUP, INC. ------------------------------------------------- (Registrant) By: /s/FRANK T. MACINNIS ------------------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) By: /s/MARK A. POMPA ------------------------------------------------- Mark A. Pompa Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Exhibit 31.1 CERTIFICATION I, Frank T. MacInnis, Chairman of the Board of Directors 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 registrants internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 29, 2008 /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 and Chief Financial 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 registrants internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 29, 2008 /s/MARK A. POMPA ------------------------------------ Mark A. Pompa Executive Vice President and Chief Financial Officer
Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of EMCOR Group, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frank T. MacInnis, Chairman of the Board of Directors and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 29, 2008 /s/FRANK T. MACINNIS ----------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer
Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of EMCOR Group, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark A. Pompa, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 29, 2008 /s/MARK A. POMPA ----------------------------------- Mark A. Pompa Executive Vice President and Chief Financial Officer