FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 - ------------------------------------------------------------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from __________ to __________ - -------------------------------------------------------------------------- Commission file number 0-2315 EMCOR Group, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 11-2125338 - ------------------------------------------------- ------------------------------ (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification Number) 101 Merritt Seven Corporate Park 06851-1060 ------------------------------ Norwalk, Connecticut (Zip Code) - ------------------------------------------------- (Address of principal executive offices) (203) 849-7800 - ------------------------------------------------- (Registrant's telephone number) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No __ Applicable Only To Issuers Involved In Bankruptcy Proceedings During The Previous Five Years Indicate by check mark whether the registrant has filed all documents required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange Act of 1934, subsequent to the distribution of securities under a plan confirmed by a court. Yes X No __ Applicable Only To Corporate Issuers Number of shares of Common Stock outstanding as of the close of business on July 28, 1998: 10,744,163 shares.
EMCOR GROUP, INC. INDEX Page No. PART I - Financial Information Item 1 Financial Statements Condensed consolidated balance sheets - as of June 30, 1998 and December 31, 1997 1 Condensed consolidated statements of operations - three months ended June 30, 1998 and 1997 3 Condensed consolidated statements of operations - six months ended June 30, 1998 and 1997 4 Condensed consolidated statements of cash flows - six months ended June 30, 1998 and 1997 5 Condensed consolidated statements of stockholders' equity and comprehensive income (loss) - six months ended June 30, 1998 and 1997 6 Notes to condensed consolidated financial statements 7 Item 2 Management's discussion and analysis of financial condition and results of operations 12 PART II - Other Information Item 1 Legal Proceedings 14 Item 4 Submission of Matters to a Vote of Security Holders 14 Item 6 Exhibits and Reports on Form 8-K 14
4 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) - ------------------------------------------ -------------------- ---------------- June 30, December 31, 1998 1997 (Unaudited) - ------------------------------------------ -------------------- ---------------- ASSETS Current Assets: Cash and cash equivalents $95,412 $49,376 Accounts receivable, net 512,230 480,997 Costs and estimated earnings in excess of billings on uncompleted contracts 87,818 73,974 Inventories 6,431 7,363 Prepaid expenses and other 11,037 10,951 -------------------- ---------------- Total Current Assets 712,928 622,661 -------------------- ---------------- Investments, Notes and Other Long-Term Receivables 7,061 5,901 Property, Plant and Equipment, Net 28,312 27,164 Other Assets 8,248 4,928 -------------------- ---------------- Total Assets $756,549 $660,654 ==================== ================ See notes to condensed consolidated financial statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Amounts) - ----------------------------------------------- ---------------- --------------- June 30, December 31, 1998 1997 (Unaudited) - ----------------------------------------------- ---------------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Borrowings under working capital credit lines $-- $9,497 Current maturities of long-term debt 812 927 Accounts payable 243,026 239,117 Billings in excess of costs and estimated earnings on uncompleted contracts 130,552 112,833 Accrued payroll and benefits 51,372 49,058 Other accrued expenses and liabilities 49,080 45,163 ---------------- --------------- Total Current Liabilities 474,842 456,595 ---------------- --------------- Long-Term Debt 117,108 63,212 Other Long-Term Obligations 47,948 45,524 Stockholders' Equity: Common Stock, $.01 par value, 30,000,000 shares authorized, 10,744,163 shares and 9,590,827 shares issued and outstanding or issuable at June 30, 1998 and December 31, 1997, respectively 107 96 Warrants 2,154 2,154 Capital Surplus 109,000 87,107 Accumulated Other Comprehensive Income (470) (195) Retained Earnings 5,860 6,161 ---------------- --------------- Total Stockholders' Equity 116,651 95,323 ---------------- --------------- Total Liabilities and Stockholders' Equity $756,549 $660,654 ================ =============== See notes to condensed consolidated financial statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts) (Unaudited) - --------------------------------------------- ---------------- ----------------- Three months ended June 30, 1998 1997 - --------------------------------------------- ---------------- ----------------- Revenues $545,547 $475,617 Costs and Expenses: Cost of sales 493,272 432,118 Selling, general and administrative 44,212 37,232 ---------------- ----------------- 537,484 469,350 ---------------- ----------------- Operating Income 8,063 6,267 Interest Expense, Net 1,365 3,051 ---------------- ----------------- Income Before Income Taxes 6,698 3,216 Provision For Income Taxes 3,024 1,319 ---------------- ----------------- Income Before Extraordinary Item 3,674 1,897 Extraordinary Item - Loss on Early Extinguishment of Debt, Net of Income Taxes -- (1,004) ---------------- ----------------- Net Income $3,674 $893 ================ ================= Per Share Information: Basic Earnings Per Share: Income Before Extraordinary Item $0.34 $0.20 Extraordinary Item - Loss on Early Extinguishment of Debt, Net of Income Taxes -- (0.11) ---------------- ----------------- Basic Earnings Per Share $0.34 $0.09 ================ ================= Diluted Earnings Per Share: Income Before Extraordinary Item $0.31 $0.19 Extraordinary Item - Loss on Early Extinguishment of Debt, Net of Income Taxes -- (0.10) ---------------- ----------------- Diluted Earnings Per Share $0.31 $0.09 ================ ================= See notes to condensed consolidated financial statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts) (Unaudited) - --------------------------------------------- ---------------- ----------------- Six months ended June 30, 1998 1997 - --------------------------------------------- ---------------- ----------------- Revenues $1,039,470 $909,387 Costs and Expenses: Cost of sales 942,955 826,823 Selling, general and administrative 84,517 72,855 ---------------- ----------------- 1,027,472 899,678 ---------------- ----------------- Operating Income 11,998 9,709 Interest Expense, Net 3,771 6,059 ---------------- ----------------- Income Before Income Taxes 8,227 3,650 Provision For Income Taxes 3,751 1,497 ---------------- ----------------- Income Before Extraordinary Item 4,476 2,153 Extraordinary Item - Loss on Early Extinguishment of Debt, Net of Income Taxes (4,777) (1,004) ---------------- ----------------- Net (Loss) Income $(301) $1,149 ================ ================= Per Share Information: Basic (Loss) Earnings Per Share: Income Before Extraordinary Item $0.44 $0.23 Extraordinary Item - Loss on Early Extinguishment of Debt, Net of Income Taxes (0.47) (0.11) ---------------- ---------------- Basic (Loss) Earnings Per Share $(0.03) $0.12 ================ ================ Diluted (Loss) Earnings Per Share: Income Before Extraordinary Item $0.41 $0.21 Extraordinary Item - Loss on Early Extinguishment of Debt, Net of Income Taxes (0.44) (0.10) ---------------- ---------------- Diluted (Loss) Earnings Per Share $(0.03) $0.11 ================ ================ See notes to condensed consolidated financial statements.
EMCOR Group, Inc. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) - ---------------------------------------------------- ------------- ------------- Six months ended June 30, 1998 1997 - ---------------------------------------------------- ------------- ------------- CASH FLOWS FROM OPERATIONS: Net (loss) income $(301) $1,149 Extraordinary Item - Loss on Early Extinguishment of Debt, Net of Income Taxes 4,777 1,004 Non-cash expenses 7,199 5,707 Changes in operating assets and liabilities (11,883) (7,045) ------------- ------------ NET CASH (USED IN) PROVIDED BY OPERATIONS (208) 815 ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Convertible Subordinated Notes 115,000 -- Net proceeds from sale of Common Stock 22,485 -- Debt issuance costs (4,074) -- Payment of Series C Notes (61,854) (11,920) Premiums paid on early extinguishment of debt (2,437) (590) Payment of working capital credit lines (9,497) (37,000) Borrowings under working capital credit lines -- 36,580 Payment of Supplemental SellCo Note (5,464) -- Payments of long-term debt and capital lease obligations (196) 31 Exercise of stock options 289 171 ------------- ------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 54,252 (12,728) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment, net (5,544) (5,201) Proceeds from sale of property, plant and equipment 94 19 Acquisition of businesses (1,398) -- Decrease in investments, notes and other long-term receivables (1,160) 1,675 ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (8,008) (3,507) ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46,036 (15,420) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 49,376 50,705 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $95,412 $35,285 ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION Cash Paid For: Interest $1,847 $4,677 Income Taxes $579 $238 See notes to condensed consolidated financial statements.
EMCOR Group, Inc. and Subsidiaries <TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (In Thousands) (Unaudited) - ------------------------------------------------------------------------------------------------------------ Accumulated Other Retained Common Capital Comprehensive Earnings/ Comprehensive Total Stock Warrants Surplus Income (1) (Deficit) Income (Loss) - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, $95,323 $96 $2,154 $87,107 $(195) $6,161 1998 Comprehensive income(loss): Net loss (301) -- -- -- -- (301) $(301) Foreign currency translation adjustments (275) -- -- -- (275) -- (275) --------------- Comprehensive loss -- -- -- -- -- -- $(576) =============== NOL utilization 1,845 -- -- 1,845 -- -- Issuance of Common Stock 22,485 11 -- 22,474 -- -- Tax effect of extraordinary item (2,715) -- -- (2,715) -- -- Common Stock issued under stock option plans 289 -- -- 289 -- -- --------- --------- ---------- -------- -------------- ---------- Balance, June 30, 1998 $116,651 $107 $2,154 $109,000 $(470) $5,860 ========= ========= ========== ======== ============== ========== Balance, January 1, $83,883 $95 $2,154 $81,672 $1,378 $(1,416) 1997 Comprehensive income (loss): Net income 1,149 -- -- -- -- 1,149 $1,149 Foreign currency translation adjustments (964) -- -- -- (964) -- (964) --------------- Comprehensive income -- -- -- -- -- -- $185 =============== NOL utilization 663 -- -- 663 -- -- Common Stock issued under stock option plans 171 -- -- 171 -- -- --------- --------- ---------- -------- -------------- ---------- Balance, June 30, 1997 $84,902 $95 $2,154 $82,506 $414 ($267) ========= ========= ========== ======== ============== ========== (1) Represents foreign currency translation adjustments. See notes to condensed consolidated financial statements. </TABLE>
EMCOR Group, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE A Nature Of Operations EMCOR Group, Inc. ("EMCOR" or the "Company") is a multinational corporation involved in mechanical and electrical construction services and facilities services. EMCOR's subsidiaries specialize in the design, integration, installation, start-up, testing, operation and maintenance of: (i) distribution systems for electrical power (including power cables, conduits, distribution panels, transformers, generators, uninterruptible power supply systems and related switch gear and control); (ii) lighting systems, including fixtures and controls; (iii) low-voltage systems, including fire alarm, security, communications and process control systems; (iv) heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems; and (v) plumbing, process and high-purity piping systems. EMCOR's subsidiaries provide mechanical and electrical construction and facilities services directly to end-users (including corporations, municipalities and other governmental entities, owners/developers, and tenants of buildings) and, indirectly, by acting as a subcontractor for construction managers, general contractors, systems suppliers and other subcontractors. Mechanical and electrical construction services are principally either large installation projects, with contracts generally in the multi-million dollar range; smaller system installation projects involving fit-out, renovation and retrofit work; and maintenance and service. In addition, certain of its subsidiaries operate and maintain mechanical and/or electrical systems for customers under contracts and provide other services commonly referred to as facilities services including the management of facilities and the provision of support services to customers at the customer's facilities. Mechanical and electrical construction and facilities services are provided to a broad range of commercial, industrial and institutional customers through offices located in major markets throughout the United States, Canada and the United Kingdom and through its joint ventures in the United Arab Emirates, Saudi Arabia, South Africa, Hong Kong and Macau. NOTE B Basis of Presentation The accompanying condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the interim period reporting requirements of Form 10-Q. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Readers of this report should refer to the consolidated financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of a normal recurring nature) necessary to present fairly the financial position of the Company and the results of its operations. The results of operations for the three and six month periods ended June 30, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998. Certain reclassifications of prior year amounts have been made to conform to current year presentation.
NOTE C Long-Term Debt Long-Term Debt in the accompanying condensed consolidated balance sheets consists of the following amounts at June 30, 1998 and December 31, 1997 (in thousands): June 30, December 31, 1998 1997 ---------------- --------------- Convertible Subordinated Notes, at 5.75%, due 2005 $115,000 $-- Series C Notes, outstanding face value of approximately $61.9 million at December 31, 1997, at 11.0%, discounted to a 14.0% effective rate, due 2001 -- 56,290 Other 2,920 7,849 ---------------- --------------- 117,920 64,139 Less current maturities (812) (927) ---------------- --------------- $117,108 $63,212 ================ =============== On March 18, 1998, the Company called for the redemption of approximately $61.9 million principal amount of Series C Notes and irrevocably funded such amounts with the trustee of the Series C Notes. In accordance with the Indenture governing the Series C Notes, the redemption price of the Series C Notes was 104% of the principal amount redeemed. Accordingly, the Company recorded an extraordinary loss related to the early retirement of debt. The extraordinary loss consisted primarily of the write-off of the associated debt discount plus the redemption premium and costs associated with the redemption, net of income tax benefits. The Company prepaid in full, including accrued interest thereon, the Supplemental SellCo Note during June 1998. On March 18, 1998, the Company sold, pursuant to an underwritten public offering, $100.0 million principal amount of 5.75% Convertible Subordinated Notes (the "Notes"). Interest on the Notes is payable semi-annually commencing October 1, 1998. The Notes are unsecured indebtedness of the Company and are convertible into Common Stock of the Company at a conversion price of $27.34 per share at any time. On March 24, 1998, the underwriter of the Notes offering exercised in full its over-allotment option to purchase an additional $15.0 million of Notes and accordingly an additional $15.0 million principal amount of such notes were issued. NOTE D Income Taxes The Company files a consolidated federal income tax return including all U.S. subsidiaries. At June 30, 1998, the Company had net operating loss carryforwards ("NOLs") for U.S. income tax purposes of approximately $165.0 million, which expire in the years 2007 through 2010. The NOLs are subject to review by the Internal Revenue Service. Future changes in ownership of the Company, as defined by Section 382 of the Internal Revenue Code, could limit the amount of NOLs available for use in any one year. As a result of the adoption of Fresh-Start Accounting, the tax benefit of any net operating loss carryforwards or net deductible temporary differences which existed as of the date of the Company's emergence from Chapter 11 in December 1994 will result in a charge to the tax provision (provision in lieu of income taxes) and be allocated to Capital Surplus.
The Company has provided a valuation allowance as of June 30, 1998 for the full amount of the tax benefit of its remaining NOLs and other deferred tax assets. Income tax expense recorded for the three and six month periods ended June 30, 1998 and 1997 represent a provision primarily for federal, foreign and state and local income taxes. The Company's utilization of NOLs and other deferred tax assets for the three and six month periods ended June 30, 1998 of approximately $1.3 million and $1.8 million, respectively, have been applied to Capital Surplus. NOTE E Legal Proceedings The Company is currently defending a lawsuit that was commenced against the Dynalectric Company ("Dynalectric"), a subsidiary of the Company, in Superior Court of New Jersey, Bergen County, arising out of Dynalectric's participation in a joint venture with the plaintiff, Computran. In the action, which was instituted in 1988, Computran, a participant in, and a subcontractor to, the joint venture alleges that Dynalectric wrongfully terminated its subcontract, fraudulently diverted funds due it, misappropriated its trade secrets and proprietary information, fraudulently induced it to enter into the joint venture and conspired with other defendants to commit certain acts in violation of the New Jersey Racketeering Influence and Corrupt Organization Act. Dynalectric believes that Computran's claims are without merit and intends to defend this matter vigorously. Dynalectric has filed counterclaims against Computran. As a result of a motion made by Dynalectric, the Superior Court of New Jersey ordered during 1997 that the matters in dispute between Dynalectric and Computran be resolved by binding arbitration in accordance with an original agreement between the parties and the arbitration is proceeding. In February 1995 as part of an investigation by the New York County District Attorney's office into the business affairs of Herbert Construction Company ("Herbert"), a general contractor that did business with the Company's subsidiary, Forest Electric Corporation ("Forest"), a search warrant was executed at Forest's executive offices. At that time, the Company was informed that Forest and certain of its officers are targets of the continuing investigation. Neither the Company nor Forest has been advised of the precise nature of any suspected violation of law by Forest or its officers. On April 7, 1997, Ted Kohl, a principal of Herbert, pled guilty to one count of money laundering, one count of offering a false instrument for filing and one count of filing a false New York State Resident Income Tax Return. DPL Interiors, Inc., a Company allegedly owned by Mr. Kohl, also pled guilty to one count of failing to file New York City General Income Tax Returns. Mr.Kohl and DPL Interiors, Inc. have not yet been sentenced. Substantial settlements or damage judgements against a subsidiary of the Company arising out of either of these matters could have a material adverse effect on the Company's business, operating results and financial condition. In addition to the above, the Company is involved in other legal proceedings and claims, asserted by and against the Company, which have arisen in the ordinary course of business. The Company believes it has a number of valid defenses to these actions and the Company intends to vigorously defend or assert these claims and does not believe that a significant liability will result. However, the Company cannot predict the outcome thereof or the impact that an adverse result of the matters discussed above will have upon the Company's financial position or results of operations. NOTE F Earnings Per Share Effective December 31, 1997 the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS No. 128" or the "Statement"), "Earnings Per Share" ("EPS"), which established standards for computing and presenting EPS. The Statement replaced the presentation of Primary EPS with a presentation of Basic EPS, as defined, and Fully Diluted EPS with Diluted EPS, as defined. The following tables summarize the Company's calculation of Basic EPS and Diluted EPS for the three and six month periods ended June 30, 1998 and 1997: Three Months Ended June 30, 1998 --------------- Income Shares Per Share (Numerator) (Denominator) Amount --------------- --------------- ------------- Basic EPS Income before extraordinary item available to common stockholders $3,674,000 10,725,320 $0.34 ============= Effect of Dilutive Securities: Options -- 244,979 Warrants -- 322,938 Convertible Subordinated Notes 1,081,000 4,206,291 --------------- --------------- Diluted EPS $4,755,000 15,499,528 $0.31 =============== =============== ============= Six Months Ended June 30, 1998 --------------- Income Shares Per Share (Numerator) (Denominator) Amount --------------- --------------- ------------- Basic EPS Income before extraordinary item available to common stockholders $4,476,000 10,247,819 $0.44 ============= Effect of Dilutive Securities: Options -- 250,939 Warrants -- 337,330 --------------- --------------- Diluted EPS $4,476,000 10,836,088 $0.41 =============== =============== ============= Three Months Ended June 30, 1997 --------------- Income Shares Per Share (Numerator) (Denominator)) Amount -------------- --------------- ------------ Basic EPS Income before extraordinary item available to common stockholders $1,897,000 9,535,697 $0.20 ============= Effect of Dilutive Securities: Options -- 396,937 Warrants -- 88,200 -------------- --------------- Diluted EPS $1,897,000 10,020,834 $0.19 ============== =============== ============
Six Months Ended June 30, 1997 --------------- Income Shares Per Share (Numerator) (Denominator)) Amount -------------- --------------- ------------ Basic EPS Income before extraordinary item available to common stockholders $2,153,000 9,525,224 $0.23 ============= Effect of Dilutive Securities: Options -- 400,632 Warrants -- 96,557 -------------- --------------- Diluted EPS $2,153,000 10,022,413 $0.21 ============== =============== ============ For the six month period ended June 30, 1998, the "if converted" amount of Notes and related after-tax interest expense were excluded from the denominator and numerator, respectively, in the calculation of Diluted EPS as the effect would be antidilutive. For the three and six month periods ended June 30, 1998, no options were excluded from the denominator in the calculation of Diluted EPS. NOTE G Common Stock Issuance On March 18, 1998 the Company sold, pursuant to an underwritten public offering, 1,100,000 shares of its Common Stock at a price of $21.875 per share. Proceeds received from the sale of the Common Stock along with proceeds received from the sale of the Notes were used to redeem the Series C Notes, repay outstanding borrowings under the Company's working capital credit lines, prepay the Supplemental SellCo Note and accrued interest thereon and will be used for possible acquisitions and for other general corporate purposes. NOTE H Other The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which requires companies to report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, in a financial statement for the period in which they are recognized. The Company has chosen to disclose Comprehensive Income, which encompasses net income and foreign currency translation adjustments, in the condensed consolidated statements of stockholders' equity and comprehensive income (loss). Prior year financial information has been restated to conform with the reporting requirements of SFAS No. 130. In June 1998, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133" or "the Statement"), which establishes accounting and reporting standards requiring derivative instruments, as defined, to be measured in the financial statements at fair value. The Statement also requires that changes in the derivatives' fair value be recognized currently in earnings unless certain accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and cannot be applied retroactively. The Company currently has one forward exchange contract which is designated as a hedge against intercompany loans to the Company's U.K. subsidiary. The Company does not expect the provision of SFAS No. 133 to have a significant effect on the current forward exchange contract or on the financial condition or results of operations of the Company.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues for the second quarter of 1998 were $545.5 million compared to $475.6 million in the second quarter of 1997. In the second quarter of 1998, the Company generated net income of $3.7 million, or $0.34 per basic and $0.31 per diluted share, compared to net income of $0.9 million, or $0.09 per basic and diluted share, in the second quarter of 1997. Net income for the second quarter of 1997 included an after-tax charge associated with the early retirement of approximately $11.9 million of the Company's Series C Notes, which is reflected in the accompanying condensed consolidated statements of operations under the caption "Extraordinary Item - Loss on Early Extinguishment of Debt, Net of Income Taxes." In addition, net income for the second quarter of 1998 includes an income tax provision of $3.0 million, of which $1.3 million will not be paid in cash due to the utilization of tax net operating loss carry forwards ("NOL's"). Had the Company been able to offset these NOL's against the recorded income tax provision, net income would have been $5.0 million. Revenues for the six months ended June 30, 1998 were $1,039.5 million compared to $909.4 million in the same period in the prior year. For the six months ended June 30, 1998, the Company incurred a net loss of $0.3 million, or $0.03 per basic and diluted share, as compared to net income of $1.1 million, or $0.12 per basic share and $0.11 per diluted share, for the six months ended June 30, 1997. The results for the first six months of 1998 and 1997 included charges of $4.8 million and $1.0 million, respectively, related to the early retirement of Series C Notes. Exclusive of these extraordinary items, net income for the first half of 1998 was $4.5 million, or $0.44 per basic share and $0.41 per diluted share, compared to $2.2 million, or $0.23 per basic share and $0.21 per diluted share, in the same period in 1997. The Company generated operating income of $8.1 million for the three months ended June 30, 1998 compared to operating income of $6.3 million in the same period of the prior year. The $1.8 million improvement in operating income for the three months ended June 30, 1998 was attributable to the increase in operating volume and the increase in gross profit as a percentage of revenue. Operating income for the first half of 1998 was $12.0 million compared to operating income of $9.7 million in the same period in the prior year, the increase being attributable to the items noted above for the second quarter of 1998. Selling, General & Administrative expenses ("SG&A") for the quarters ended June 30, 1998 and 1997 were $44.2 million, or 8.1% of revenues, and $37.2 million, or 7.8% of revenues, respectively. SG&A for the six months ended June 30, 1998 was $84.5 million, or 8.1% of revenues, compared to SG&A of $72.9 million, or 8.0% of revenues, for the six months ended June 30, 1997. The dollar increase in SG&A for the three and six month periods ended June 30, 1998 compared to the same periods in 1997 are attributable to the increase in operating volume. On March 18, 1998, the Company called for the redemption of approximately $61.9 million principal amount of Series C Notes. In accordance with the Indenture governing the Series C Notes, the redemption price of the Series C Notes was 104% of the principal amount redeemed. Accordingly, the Company recorded an extraordinary loss related to the early retirement of debt. The extraordinary loss consisted primarily of the write-off of the associated debt discount plus the redemption premium and costs associated with the redemption, net of income tax benefits. The Company prepaid in full, including accrued interest thereon, the Supplemental SellCo Note during June, 1998. The Company's backlog was $1,094.5 million at June 30, 1998 and $996.4 million at December 31, 1997. Between December 31, 1997 and June 30, 1998, the Company's backlog in Canada increased by $25.6 million, its backlog in the United States increased by $81.1 million and its backlog in the United Kingdom decreased by $8.5 million. Liquidity and Capital Resources On March 18, 1998, the Company sold, pursuant to underwritten public offerings, $100.0 million principal amount of 5.75% Convertible Subordinated Notes (the "Notes") and 1,100,000 shares of its Common Stock. Interest on the Notes is payable semi-annually commencing October 1, 1998. The Notes are unsecured indebtedness of the Company and are convertible into Common Stock of the Company at a conversion price of $27.34 per share at any time. On March 24, 1998, the underwriter of the Notes offering exercised in full its over-allotment option to purchase an additional $15.0 million of Notes and accordingly an additional $15.0 million principal amount of such notes were issued. Proceeds received from the sale of the Notes along with proceeds from the sale of the Common Stock were used to redeem the Series C Notes, repay outstanding borrowings under the Company's working capital credit lines, prepay the Supplemental SellCo Note and accrued interest thereon and will be used for possible acquisitions and for other general corporate purposes. The Company's consolidated cash balance increased by approximately $46.0 million from $49.4 million at December 31, 1997 to $95.4 million at June 30, 1998, primarily as a result of the net proceeds received from the sale of Common Stock and Notes offset by the repayment of debt instruments noted above. As of June 30, 1998 the Company's total borrowing capacity under its revolving credit facility was $100.0 million. The Company had approximately $29.0 million of letters of credit outstanding as of that date. There were no revolving loans outstanding as of June 30, 1998. Year 2000 The Company has performed a comprehensive review of its computer systems to identify systems that could be affected by the Year 2000 issue and is developing a plan to resolve the issue. The Company is utilizing both internal and external resources to identify, correct or reprogram, and test the systems to ensure Year 2000 compliance. Preliminary cost estimates of testing and converting system applications range from $1.0 million to $2.0 million. Maintenance and modification cots will be expensed as incurred, while costs of new software will be capitalized and amortized over the expected useful life of the related software. The Company expects its Year 2000 conversion project to be completed on a timely basis. However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be converted on a timely basis. A failure to convert successfully by another company could have an adverse effect on the Company's systems. This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in any such forward-looking statements. Such factors include, but are not limited to, adverse changes in general economic conditions, including changes in the specific markets for the Company's services, adverse business conditions, decreased or lack of growth in the mechanical and electrical construction and facilities services industries, increased competition, pricing pressures, risks associated with foreign operations and other factors.
PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The information in Note E to the Company's June 30, 1998 Notes to Condensed Consolidated Financial Statements (unaudited) regarding legal proceedings is hereby incorporated herein by reference thereto. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On June 19, 1998 the Company held its annual meeting of stockholders. (b) At the annual meeting each of the seven individuals nominated for election as a director of the Company for the ensuing year was elected. The seven directors constituted all of the members of the Board of Directors of the Company. Stephen W. Bershad received 6,745,529 votes, David A. B. Brown received 6,745,501 votes, Georges de Buffevent received 6,755,529 votes, Albert Fried, Jr. received 6,292,329 votes, Richard Hamm received 6,314,829 votes, Frank T. MacInnis received 6,755,529 votes, and Kevin R. Toner received 6,304,829 votes. There were no broker non-votes. (c) The stockholders voted upon a proposal to approve the adoption of the Company's 1997 Non-Employee Directors' Non-qualified Stock Option Plan for Directors. 3,951,885 shares were voted in favor of the 1997 Directors' Stock Option Plan, 2,179,290 shares were voted against the 1997 Directors' Stock Option Plan and 48,391 shares abstained from voting thereon. There were no broker non-votes. (d) The stockholders voted upon a proposal to approve the adoption of the Company's 1997 Stock Plan for Directors. 3,134,814 shares were voted in favor of the 1997 Stock Plan for Directors, 2,999,481 shares were voted against the 1997 Stock Plan for Directors and 48,891 shares abstained from voting thereon. There were no broker non-votes. (e) The stockholders also voted upon a proposal to ratify the appointment by the Audit Committee of the Board of Directors of Arthur Andersen LLP, certified public accountants, as the Company's independent public accountants for 1998. 8,209,351 shares were voted in favor of ratification, 2,000 voted against ratification and 1,800 shares abstained from voting thereon. There were no broker non-votes. (f) The meeting was adjourned until July 13, 1998 in order that more stockholders might consider and vote upon a proposal to approve an amendment to the Company's 1994 Management Stock Option Plan increasing the aggregate number of shares of the Company's Common Stock for which options may be granted under that Plan from 1,000,000 to 2,000,000. At the meeting held July 13, 1998, 3,264,930 shares were voted in favor of the amendment, 4,121,515 shares were voted against the amendment and 398,791 shares abstained from voting thereon. There were no broker non-votes. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 10(a) Continuity Agreement dated as of June 22, 1998 between Frank T. MacInnis and EMCOR Group, Inc. Exhibit10(b) Continuity Agreement dated as of June 22, 1998 between Jeffrey M. Levy and EMCOR Group, Inc. Exhibit10(c) Continuity Agreement dated as of June 22, 1998 between Sheldon I. Cammaker and EMCOR Group, Inc. Exhibit10(d) Continuity Agreement dated as of June 22, 1998 between Leicle E. Chesser and EMCOR Group, Inc. Exhibit10(e) Continuity Agreement dated as of June 22, 1998 between Thomas D. Cunningham and EMCOR Group, Inc. Exhibit10(f) Continuity Agreement dated as of June 22, 1998 between R. Kevin Matz and EMCOR Group, Inc. Exhibit10(g) Continuity Agreement dated as of June 22, 1998 between Mark A. Pompa and EMCOR Group, Inc. Exhibit 27 Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter ended June 30, 1998.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EMCOR GROUP, INC. --------------------------------------- (Registrant) Date: July 29, 1998 By: /s/FRANK T. MacINNIS --------------------------------------- Frank T. MacInnis Chairman of the Board of Directors and Chief Executive Officer Date: July 29, 1998 By: /s/LEICLE E. CHESSER --------------------------------------- --------------------------------------- Leicle E. Chesser Executive Vice President and Chief Financial Officer