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
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 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 __________
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Commission file number 0-2315
EMCOR Group, Inc.
----------------------------------------------
(Exact name of registrant as specified in
its charter)
Delaware 11-2125338
- ----------------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
101 Merritt Seven Corporate Park 06851-1060
-------------------------
Norwalk, Connecticut (Zip Code)
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(Address of principal executive offices)
(203) 849-7800
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(Registrant's telephone number)
N/A
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(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
October 28, 1998: 9,952,803 shares.
<PAGE>
EMCOR GROUP, INC.
INDEX
Page No.
PART I - Financial Information
Item 1 Financial Statements
Condensed consolidated balance sheets -
as of September 30, 1998 and December 31, 1997 1
Condensed consolidated statements of operations -
three months ended September 30, 1998 and 1997 3
Condensed consolidated statements of operations -
nine months ended September 30, 1998 and 1997 4
Condensed consolidated statements of cash flows -
nine months ended September 30, 1998 and 1997 5
Condensed consolidated statements of stockholders'
equity and comprehensive income -
nine months ended September 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 13
PART II - Other Information
Item 1 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 6 Exhibits and Reports on Form 8-K 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- ----------------------------------------------------------------------
September 30, December 31,
1998 1997
(Unaudited)
- ----------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $68,308 $49,376
Accounts receivable, net 551,749 480,997
Costs and estimated earnings in
excess of billings on
uncompleted contracts 85,093 73,974
Inventories 6,279 7,363
Prepaid expenses and other 9,400 10,951
----------------------------------
Total Current Assets 720,829 622,661
----------------------------------
Investments, Notes and Other Long-Term
Receivables 6,831 5,901
Property, Plant and Equipment, Net 30,967 27,164
Other Assets 18,463 4,928
----------------------------------
Total Assets $777,090 $660,654
==================================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
- ----------------------------------------------------------------------
September 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 1,927 927
Accounts payable 236,587 239,117
Billings in excess of costs and
estimated earnings on uncompleted
contracts 147,944 112,833
Accrued payroll and benefits 57,970 49,058
Other accrued expenses and liabilities 54,022 45,163
---------------------------
Total Current Liabilities 498,450 456,595
---------------------------
Long-Term Debt 117,819 63,212
Other Long-Term Obligations 47,372 45,524
Stockholders' Equity:
Common Stock - par value $0.01
Authorized - 30,000,000 shares
Outstanding - 9,960,903 and 9,590,827
shares, respectively 108 96
Warrants 2,154 2,154
Capital Surplus 112,632 87,107
Accumulated Other Comprehensive Income (1,180) (195)
Retained Earnings 11,620 6,161
Treasury Stock, at cost, 827,600
shares at September 30, 1998
and 0 shares at December 31, 1997 (11,885) --
---------------------------
Total Stockholders' Equity 113,449 95,323
---------------------------
Total Liabilities and Stockholders' Equity $777,090 $660,654
===========================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts) (Unaudited)
- ----------------------------------------------------------------------
Three months ended September 30, 1998 1997
- ----------------------------------------------------------------------
Revenues $565,964 $521,975
Costs and Expenses:
Cost of sales 508,010 473,445
Selling, general and administrative 45,939 39,940
-----------------------------
553,949 513,385
-----------------------------
Operating Income 12,015 8,590
Interest Expense, Net 1,866 3,106
-----------------------------
Income Before Income Taxes 10,149 5,484
Provision for Income Taxes 4,389 2,248
-----------------------------
Net Income $5,760 $3,236
=============================
Per Share Information:
Basic Earnings Per Share $0.55 $0.34
=============================
Diluted Earnings Per Share $0.45 $0.32
=============================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts) (Unaudited)
- ----------------------------------------------------------------------
Nine months ended September 30, 1998 1997
- ----------------------------------------------------------------------
Revenues $1,605,434 $1,431,362
Costs and Expenses:
Cost of sales 1,450,965 1,300,268
Selling, general and administrative 130,456 112,795
-----------------------------
1,581,421 1,413,063
-----------------------------
Operating Income 24,013 18,299
Interest Expense, Net 5,637 9,165
-----------------------------
Income Before Income Taxes 18,376 9,134
Provision For Income Taxes 8,140 3,745
-----------------------------
Income Before Extraordinary Item 10,236 5,389
Extraordinary Item - Loss on Early
Extinguishment of Debt, Net of
Income Taxes (4,777) (1,004)
-----------------------------
Net Income $5,459 $4,385
=============================
Per Share Information:
Basic Earnings Per Share:
Income Before Extraordinary Item $0.99 $0.57
Extraordinary Item - Loss on Early
Extinguishment of Debt, Net of
Income Taxes (0.46) (0.11)
-----------------------------
Basic Earnings Per Share $0.53 $0.46
=============================
Diluted Earnings Per Share:
Income Before Extraordinary Item $0.90 $0.53
Extraordinary Item - Loss on Early
Extinguishment of Debt, Net of
Income Taxes (0.34) (0.10)
-----------------------------
Diluted Earnings Per Share $0.56 $0.43
=============================
See notes to condensed consolidated financial statements.
<PAGE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands) (Unaudited)
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Nine months ended September 30, 1998 1997
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CASH FLOWS FROM OPERATIONS:
Net income $5,459 $4,385
Extraordinary Item - Loss on Early
Extinguishment of Debt,
Net of Income Taxes 4,777 1,004
Non-cash expenses 13,401 11,171
Changes in operating assets and liabilities (13,100) (7,899)
-----------------------
NET CASH PROVIDED BY OPERATIONS 10,537 8,661
-----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Convertible Subordinated Notes 115,000 --
Net proceeds from sale of Common Stock 22,485 --
Purchase of Treasury Stock (11,885) --
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) (102,512)
Borrowings under working capital credit lines -- 105,908
Payment of Supplemental SellCo Note (5,464) --
Issuance of long-term debt and capital lease
obligations 1,630 58
Exercise of stock options 517 344
-----------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 44,421 (8,712)
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment,
net (8,228) (7,471)
Proceeds from sale of property, plant and
equipment 119 141
Acquisition of businesses (26,987) --
(Increase) decrease in investments, notes
and other long-term receivables (930) 631
-----------------------
NET CASH USED IN INVESTING ACTIVITIES (36,026) (6,699)
-----------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 18,932 (6,750)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 49,376 50,705
-----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $68,308 $43,955
=======================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid For:
Interest $2,493 $6,997
Income Taxes $707 $361
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(In Thousands) (Unaudited)
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Accumulated
Other Retained
Common Capital Comprehensive Earnings/ Treasury Comprehensive
Total Stock Warrants Surplus Income (1) (Deficit) Stock Income
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1998 $95,323 $96 $2,154 $87,107 $(195) $6,161 $--
Comprehensive income:
Net income 5,459 -- -- -- -- 5,459 -- $5,459
Foreign currency
translation
adjustments (985) -- -- (985) -- -- (985)
----------
Comprehensive
income -- -- -- -- -- -- -- $4,474
==========
NOL utilization 5,250 -- -- 5,250 -- -- --
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 517 1 -- 516 -- -- --
Treasury stock, at
cost 827,600 (11,885) -- -- -- -- -- (11,885)
shares
-------- -------- ------- ------- --------- -------- ---------
Balance, September
30, 1998 $113,449 $108 $2,154 $112,632 $(1,180) $11,620 $(11,885)
======== ======== ======= ======= ========= ======== =========
Balance, January
1, 1997 $83,883 $95 $2,154 $81,672 $1,378 $(1,416) $--
Comprehensive income:
Net income 4,385 -- -- -- -- 4,385 -- $4,385
Foreign currency
translation
adjustments (764) -- -- -- (764) -- -- (764)
----------
Comprehensive income -- -- -- -- -- -- -- $3,621
==========
NOL utilization 2,528 -- -- 2,528 -- -- --
Common Stock issued
under stock option
plans 344 1 -- 343 -- -- --
-------- -------- ------- ------- --------- -------- -------
Balance, September
30, 1997 $90,376 $96 $2,154 $84,543 $614 $2,969 $--
======== ======== ======= ======= ========= ======== =======
(1) Represents cumulative foreign currency translation adjustments.
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
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 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 nine month periods ended September 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 Other Assets
Other assets at September 30, 1998 primarily consists of approximately $12.3
million of the excess of cost over fair market value of net identifiable assets
("Goodwill") of companies acquired in purchase transactions as well as
approximately $3.5 million of debt issuance costs incurred in connection with
the Company's offering of its 5.75% Convertible Subordinated Notes (hereafter
discussed). Goodwill is being amortized using the straight-line method over 15
year periods. Debt issuance costs are amortized using the interest method
through the Notes maturity date (April 1, 2005).
Other assets at December 31, 1997 included approximately $1.0 million of
Goodwill. The carrying value of Goodwill is periodically reviewed by the Company
on the expected future undiscounted operating cash flow of the related business
unit. Based upon its most recent analysis, the Company believes that no
impairment of intangible assets exists at September 30, 1998 or December 31,
1997.
NOTE D Long-Term Debt
Long-Term Debt in the accompanying condensed consolidated balance sheets
consists of the following amounts at September 30, 1998 and December 31, 1997
(in thousands):
September 30 December 31,
1997 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 4,746 7,849
------------- ------------
119,746 64,139
Less current maturities (1,927) (927)
------------- ------------
$117,819 $63,212
============= ============
On March 18, 1998, the Company called for redemption of approximately $61.9
million principal amount of Series C Notes and irrevocably funded such amounts,
together with a redemption premium, 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, Notes in the additional principal amount of $15.0 million
were issued.
NOTE E Income Taxes
The Company files a consolidated federal income tax return including all U.S.
subsidiaries. At September 30, 1998, the Company had net operating loss
carryforwards ("NOLs") for U.S. income tax purposes of approximately $155.0
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 September 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 nine month periods ended
September 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 nine month periods ended September 30,
1998 of approximately $3.4 million and $5.3 million, respectively, have been
added to Capital Surplus.
NOTE F 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 is defending 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. 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.
On July 31, 1998, a former employee of a subsidiary of EMCOR filed a
class-action complaint on behalf of the participants in two employee benefit
plans sponsored by EMCOR against EMCOR and other defendants for breach of
fiduciary duty under the Employee Retirement Income Security Act. All of the
claims relate to alleged acts or omissions which occurred during the period May
1, 1991 to December 15, 1994.
The principal allegations of the complaint are that the defendants breached
their fiduciary duties by causing the plans to purchase and hold stock of EMCOR
when it was then known as JWP INC. and when the defendants knew or should have
known it was imprudent to do so. The plaintiff has not made claim for a specific
dollar amount of damages but generally seeks to recover for the pension plans
the loss in value of JWP stock held by the plans.
EMCOR and the other defendants intend to vigorously defend the case. Insurance
coverage may be applicable under an EMCOR pension trust liability insurance
policy for EMCOR and present and former employees of EMCOR who are defendants.
Substantial settlements or damage judgements against the Company or a subsidiary
of the Company arising out of any 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 G 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 nine month periods ended September 30, 1998 and
1997:
Three Months Ended
September 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------------------
Basic EPS
Income available to common
stockholders $5,760,000 10,489,173 $0.55
=============
Effect of Dilutive Securities:
Options -- 217,645
Warrants -- 158,531
Convertible Subordinated
Notes 1,081,000 4,206,291
------------- -------------
Diluted EPS $6,841,000 15,071,640 $0.45
============= ==========================
<PAGE>
NOTE G Earnings Per Share (continued)
Nine Months Ended
September 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- --------------------------
Basic EPS
Income before extraordinary
item available to common
stockholders $10,236,000 10,329,154 $0.99
=============
Effect of Dilutive Securities:
Options -- 259,235
Warrants -- 279,291
Convertible Subordinated
Notes 2,331,000 3,023,251
------------- -------------
Diluted EPS $12,567,000 13,890,931 $0.90
============= ==========================
Three Months Ended
September 30, 1997
Income Shares Per Share
(Numerator) (Denominator)) Amount
------------ ------------- ------------
Basic EPS
Income available to common
stockholders $3,236,000 9,555,619 $0.34
============
Effect of Dilutive Securities:
Options -- 309,996
Warrants -- 299,481
------------ -------------
Diluted EPS $3,236,000 10,165,096 $0.32
============ ============= ============
Nine Months Ended
September 30, 1997
Income Shares Per Share
(Numerator) (Denominator)) Amount
------------ ------------- ------------
Basic EPS
Income before extraordinary
item available to common
stockholders $5,389,000 9,535,467 $0.57
============
Effect of Dilutive Securities:
Options -- 309,996
Warrants -- 299,481
------------ -------------
Diluted EPS $5,389,000 10,144,944 $0.53
============ ============= ============
For the three and nine month periods ended September 30, 1998, approximately
325,000 and 310,000 options, respectively, were excluded from the denominator in
the calculation of Diluted EPS as the effect would be antidilutive. For the
three months ended September 30, 1998, approximately 605,000 warrants were also
excluded from the denominator in the calculation of Diluted EPS as the effect
would be antidilutive.
<PAGE>
NOTE H 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.
NOTE I Common Stock
As of September 30, 1998, the Company had 10,788,503 of its Common Stock issued
or issuable of which 9,960,903 shares were outstanding as of that date. As of
December 31, 1997, 9,590,827 shares of the Company's Common Stock were issued or
issuable and outstanding.
As a part of a program previously authorized by the Board of Directors, the
Company purchased 827,600 shares of its common stock in the third quarter of
1998 at an aggregate cost of approximately $11.9 million which are classified as
"Treasury Stock, at Cost" in the accompanying Condensed Consolidated Balance
Sheets.
NOTE J 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.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Revenues for the third quarter of 1998 were $566.0 million compared to $522.0
million in the third quarter of 1997. The increase in revenues for the third
quarter of 1998 as well as the year to date 1998 period when compared to
corresponding 1997 levels are due to: (a) an increase in large projects started
in the second and third quarters of 1998: (b) an increase in revenues in
previously lagging market segments within the United States including the
Northeast commercial and Western industrial markets and; (c) the acquisition of
certain businesses primarily in the third quarter of 1998. In the third quarter
of 1998, the Company generated net income of $5.8 million, or $0.55 per basic
and $0.45 per diluted share, compared to net income of $3.2 million, or $0.34
per basic share and $0.32 per diluted share, in the third quarter of 1997. In
addition, net income for the third quarter of 1998 includes an income tax
provision of $4.4 million, of which $3.4 million will not be paid in cash due to
the utilization of tax net operating loss carry forwards ("NOLs"). Had the
Company been able to offset these NOLs against the recorded income tax
provision, net income would have been approximately $9.2 million.
Revenues for the nine months ended September 30, 1998 were $1,605.4 million
compared to $1,431.4 million in the same period in the prior year. For the nine
months ended September 30, 1998, the Company generated net income of $5.5
million, or $0.53 per basic share and $0.56 per diluted share, as compared to
net income of $4.4 million, or $0.46 per basic share and $0.43 per diluted
share, for the nine months ended September 30, 1997. Net income for the nine
months ended September 30, 1998 and 1997 included after-tax charges associated
with the early retirement of approximately $61.9 million and $11.9 million,
respectively, of the Company's Series C Notes, which are reflected in the
accompanying condensed consolidated statements of operations under the caption
"Extraordinary Item - Loss on Early Extinguishment of Debt, Net of Income
Taxes." The extraordinary charges for the nine months ended September 30, 1998
and 1997 were $4.8 million and $1.0 million, respectively. Exclusive of these
extraordinary items, net income for the first nine months of 1998 was $10.2
million, or $0.99 per basic share and $0.90 per diluted share, compared to $5.4
million, or $0.57 per basic share and $0.53 per diluted share, in the same
period in 1997.
The Company generated operating income of $12.0 million for the three months
ended September 30, 1998 compared to operating income of $8.6 million in the
same period of the prior year. The $3.4 million improvement in operating income
for the three months ended September 30, 1998 was attributable to the increase
in operating volume and the increase in gross profit on several large projects.
Operating income for the first nine months of 1998 was $24.0 million compared to
operating income of $18.3 million in the same period in the prior year, the
increase being attributable to the items noted above for the third quarter of
1998.
Selling, General & Administrative expenses ("SG&A") for the quarters ended
September 30, 1998 and 1997 were $45.9 million, or 8.1% of revenues, and $39.9
million, or 7.7% of revenues, respectively. SG&A for the nine months ended
September 30, 1998 was $130.5 million, or 8.1% of revenues, compared to SG&A of
$112.8 million, or 7.9% of revenues, for the nine months ended September 30,
1997. The dollar increase in SG&A for the three and nine month periods ended
September 30, 1998 compared to the same periods in 1997 are attributable to the
increase in operating volume, the amortization of goodwill in connection with
the acquisitions noted previously, expenses attributable to its facilities
services business and a delay in the start of projects in the facilities
services markets.
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 for 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,
its Supplemental SellCo Note during June 1998.
The Company's backlog was $1,269.9 million at September 30, 1998 and $996.4
million at December 31, 1997. Between December 31, 1997 and September 30, 1998,
the Company's backlog in Canada increased by $18.2 million, its backlog in the
United States increased by $161.1 million and its backlog in the United Kingdom
increased by $94.2 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 and commenced October 1, 1998. The Notes are unsecured
indebtedness of the Company and are convertible at any time into Common Stock of
the Company at a conversion price of $27.34 per share.
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.
During the third quarter of 1998, the Company's Board of Directors authorized a
stock repurchase program under which the Company may repurchase up to $20.0
million of its common stock. As of September 30, 1998 the Company had
repurchased 827,600 shares of its Common Stock at an aggregate cost of
approximately $11.9 million.
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 then
outstanding borrowings under the Company's working capital credit lines, prepay
the Supplemental SellCo Note and accrued interest thereon and for the
acquisition of certain businesses through September 30, 1998 and will be used
for possible additional acquisitions and for other general corporate purposes.
The Company's consolidated cash balance increased by approximately $18.9 million
from $49.4 million at December 31, 1997 to $68.3 million at September 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, repurchase of the
Company's Common Stock and acquisitions noted above.
As of September 30, 1998 the Company's total borrowing capacity under its
revolving credit facility was $100.0 million. The Company had approximately
$30.0 million of letters of credit outstanding as of that date. There were no
revolving loans outstanding as of September 30, 1998 under the credit facility.
Year 2000
The Year 2000 issue concerns the inability of information systems to properly
recognize and process date sensitive information beyond January 1, 2000.
The Company has performed a comprehensive review of its internal application
systems ("Internal Systems"), including information technology ("IT") system and
Non-IT systems, to identify those systems that could be affected by the Year
2000 issue (the "Issue") and has developed a plan to resolve the Issue. The
Company is utilizing both internal and external resources to identify, correct
or reprogram, and test its systems to ensure Year 2000 compliance.
The Company estimates that it is approximately 50% complete with its Internal
Systems modifications and expects the balance of any required modifications to
be completed by mid 1999. Cost estimates of testing and converting system
applications range from $1.0 million to $2.0 million. Modification costs will be
expensed as incurred and 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 before
January 1, 2000. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, the Company's operations and financial results
could be adversely impacted by the Year 2000 issue if the conversion schedule
and cost estimate for its Internal Systems are not met or suppliers and other
businesses on which the Company relies do not address the Issue successfully.
The Company is requesting that its significant suppliers confirm that they have
plans achieving Year 2000 compliance. The Company continues to assess these
risks in order to reduce any impact on the Company.
Contingency plans will be developed if it appears that the Company or its
significant suppliers will not be Year 2000 compliant and that such
non-compliance could have a material adverse impact on the Company's operations.
Based on currently available information, the Company does not believe that the
matters discussed above related to its Internal Systems or to services provided
to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier, customer or another third party would not have a material adverse
effect on the Company.
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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The information in Note F to the Company's September 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
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1998.
<PAGE>
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: October 29, 1998 By: /s/FRANK T. MacINNIS
---------------------------------
Frank T. MacInnis
Chairman of the Board of
Directors and
Chief Executive Officer
Date: October 29, 1998 By: /s/LEICLE E. CHESSER
---------------------------------
Leicle E. Chesser
Executive Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
EMCOR's Condensed Consolidated Financial Statements for the nine months
ended September 30, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
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<NAME> EMCOR Group, Inc.
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