ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Description
We are one of the largest electrical and mechanical construction and facilities services firms in the United States. In addition, we provide a number of building services and industrial services. Our services are provided to a broad range of commercial, industrial, utility and institutional customers through approximately 85 operating subsidiaries. Our offices are located in the United States and the United Kingdom.
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; process instrumentation in the refining, chemical processing, food processing, and mining industries; low-voltage systems, such as fire alarm, security, and process control; voice and data communication, including fiber-optic and low-voltage cabling, distributed antenna systems, and audiovisual systems; roadway and transit lighting and signaling; 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; controls and filtration; water and wastewater treatment; central plant heating and cooling; cranes and rigging; millwrighting; and steel fabrication, erection and welding); (c) United States building services; (d) United States industrial services; and (e) United Kingdom building services. The “United States building services” and “United Kingdom building services” segments principally consist of those operations which provide a portfolio of services needed to support the operation and maintenance of customers’ facilities, including commercial and government site-based operations and maintenance; facility management, maintenance, and services; outage services to utilities and industrial plants; military base operations support services; mobile mechanical maintenance and services, including maintenance and service of mechanical, electrical, plumbing, and building automation systems; indoor air quality improvement services; floor care and janitorial services; landscaping, lot sweeping, and snow removal; other building services, including reception, security, and catering services; vendor management; call center services; installation and support for building systems; program development, management and maintenance for energy systems; technical consulting and diagnostic services; infrastructure and building projects for federal, state and local governmental agencies and bodies; and small modification and retrofit projects, which services are not generally related to customers’ construction programs. The “United States industrial services” segment principally consists of those operations which provide industrial maintenance and services for refineries, petrochemical plants, and other customers within the oil and gas industry. Services of this segment include refinery turnaround planning and engineering; specialty welding; overhaul and maintenance of critical process units; specialty technical services; on-site repairs, maintenance and service of heat exchangers, towers, vessels, and piping; and design, manufacturing, repair, and hydro blast cleaning of shell and tube heat exchangers and related equipment.
COVID-19 and Market Update
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged and has spread around the world. On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic. In response, government authorities in the U.S. and U.K. imposed various social distancing, quarantine, and isolation measures on large portions of the population.
As a result of the pandemic, as well as the related containment and mitigation measures, we have experienced disruptions that have impacted our ability to execute on our remaining performance obligations in many of the markets in which we operate. Such impacts include, but are not limited to, access restrictions and temporary job site shutdowns, reduced labor efficiency resulting from the adherence to physical distancing and other enhanced safety protocols mandated at the majority of our worksite locations, and the curtailment or deferral of maintenance and service projects by our customers. Although we have not experienced significant project cancellations, and we continue to actively quote new work for our customers, as evidenced by the 14% increase in our remaining performance obligations since December 31, 2019, we are experiencing delays in certain projects and a reduction in the number of call-out service and repair opportunities. Additionally, the demand for oil has significantly deteriorated as a result of the pandemic and the corresponding preventative measures taken around the world to mitigate the spread of the virus, including travel restrictions imposed by various local, state, and other governmental authorities. Other macroeconomic events, including geopolitical tensions between the Organization of Petroleum Exporting Countries (“OPEC”) and Russia, resulted in significant volatility in the price of crude oil during the first half of 2020. Although oil prices have subsequently experienced a partial recovery, the overall uncertainty driven by these events has significantly impacted the markets in which our United States industrial services segment operates. As a result, many customers have responded by reducing capital spending, implementing various cost cutting measures, and closing certain of their facilities. Such customer actions have resulted in a significant decrease in the demand for our service offerings within such segment.
During the second half of the year, we experienced stabilization within our United States construction segments and our United States and United Kingdom building services segments as certain shelter-in-place orders were lifted, various other containment and mitigation measures were eased, and/or our teams and customers further adapted to this new work environment; however, this positive trend may not continue. The extent to which the COVID-19 pandemic will impact our business and results of operations in future periods remains highly uncertain and will be affected by a number of factors. These include the duration and extent of the pandemic; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to quarantine; the extent, duration, and effective execution of ongoing government stabilization and recovery efforts; the timing, availability, efficacy, adoption, and distribution of vaccines or other preventative treatments; the continued impact of the pandemic on broader economic activity, including on construction projects and the oil and gas and related industrial markets; our customers’ demand for our services; our ability to effectively operate in this environment; the ability of our customers to pay us for services rendered; and any prolonged delays or shutdowns of active projects or closures of our and our customers’ offices and facilities. To date, we have been able to source the supplies and materials needed to operate our business with minimal disruptions. However, the impact of the COVID-19 pandemic on our vendors continues to evolve and may make it difficult to obtain such materials in future periods. While we believe our remaining performance obligations are firm, customers may also slow down decision-making, delay planned work or seek to terminate existing agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations.
2020 versus 2019
Overview
The following table presents selected financial data for the fiscal years ended December 31, 2020 and 2019 (in thousands, except percentages and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Revenues
|
$
|
8,797,061
|
|
|
$
|
9,174,611
|
|
Revenues (decrease) increase from prior year
|
(4.1)
|
%
|
|
12.8
|
%
|
Gross profit
|
$
|
1,395,382
|
|
|
$
|
1,355,868
|
|
Gross profit as a percentage of revenues
|
15.9
|
%
|
|
14.8
|
%
|
Restructuring expenses
|
$
|
2,214
|
|
|
$
|
1,523
|
|
Impairment loss on goodwill, identifiable intangible assets, and other long-lived assets
|
$
|
232,750
|
|
|
$
|
—
|
|
Operating income
|
$
|
256,834
|
|
|
$
|
460,892
|
|
Operating income as a percentage of revenues
|
2.9
|
%
|
|
5.0
|
%
|
Net income attributable to EMCOR Group, Inc.
|
$
|
132,943
|
|
|
$
|
325,140
|
|
Diluted earnings per common share from continuing operations
|
$
|
2.40
|
|
|
$
|
5.75
|
|
Revenues of $8.80 billion for the year ended December 31, 2020 decreased by 4.1% from revenues of $9.17 billion for the year ended December 31, 2019. As discussed in further detail below, such decrease in revenues was attributable to revenue declines within our United States industrial services segment and our United States electrical construction and facilities services segment, largely as a result of a decrease in demand for our service offerings within the oil and gas and related industrial markets given the aforementioned negative macroeconomic conditions impacting these markets. These revenue declines were partially offset by revenue growth within our United States mechanical construction and facilities services segment and our United States building services segment, inclusive of the impact of businesses acquired, as discussed below, as well as an increase in revenues of our United Kingdom building services segment.
Operating income for 2020 was $256.8 million, or 2.9% of revenues, compared to operating income of $460.9 million, or 5.0% of revenues, in 2019. Our operating results for the year ended December 31, 2020 included $232.8 million of non-cash impairment charges recorded during the second quarter, primarily within our United States industrial services segment, which negatively impacted the Company’s operating margin for 2020 by approximately 270 basis points. Excluding the impact of such impairments, operating income and operating margin for the twelve months ended December 31, 2020 increased by $28.7 million and 60 basis points, respectively, primarily as a result of favorable execution within our United States construction segments, as described in further detail below.
Net income of $132.9 million, or $2.40 per diluted share, for the year ended December 31, 2020, compares unfavorably to net income of $325.1 million, or $5.75 per diluted share, for the year ended December 31, 2019. The decline in both net income and diluted earnings per common share are a result of the aforementioned impairment charges and the related tax effects as the majority of such charges are non-deductible for tax purposes.
Impact of Acquisitions
In order to provide a more meaningful period-over-period discussion of our operating results, we may discuss amounts generated or incurred (revenues, gross profit, selling, general and administrative expenses and operating income) from companies acquired. The amounts discussed reflect the acquired companies’ operating results in the current reported period only for the time period these entities were not owned by EMCOR in the comparable prior reported period.
We acquired three companies in 2020, including: (a) a company that provides building automation and controls solutions within the Northeastern region of the United States, (b) a full service provider of mechanical services within the Washington, D.C. metro area, and (c) a company, the results of operations of which were de minimis, that provides mobile mechanical services in the Southern region of the United States. The results of operations for all three companies have been included within our United States building services segment.
On November 1, 2019, we completed the acquisition of Batchelor & Kimball, Inc. (“BKI”), a leading full service provider of mechanical construction and maintenance services. This acquisition strengthens our position and broadens our capabilities in the Southern and Southeastern regions of the United States, and the results of its operations have been included within our United States mechanical construction and facilities services segment. In addition to BKI, during 2019, we acquired: (a) a company that provides electrical contracting services in central Iowa, the results of operations of which have been included within our United States electrical construction and facilities services segment, (b) a company that provides mechanical contracting services in south-central and eastern Texas, the results of operations of which have been included within our United States mechanical construction and facilities services segment, and (c) four companies included within our United States building services segment, consisting of: (i) a company that provides mobile mechanical services in the Southern region of the United States and (ii) three companies, the results of operations of which were de minimis, which bolster our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions.
Companies acquired in 2020 and 2019 generated incremental revenues of $269.6 million and incremental operating income of $15.4 million, inclusive of $16.0 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2020.
Discussion and Analysis of Results of Operations
Revenues
The following table presents our revenues for each of our operating segments and the approximate percentages that each segment’s revenues were of total revenues for the years ended December 31, 2020 and 2019 (in thousands, except for percentages):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Total
|
|
2019
|
|
% of
Total
|
Revenues from unrelated entities:
|
|
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
1,973,427
|
|
|
22
|
%
|
|
$
|
2,216,600
|
|
|
24
|
%
|
United States mechanical construction and facilities services
|
3,485,495
|
|
|
40
|
%
|
|
3,340,337
|
|
|
36
|
%
|
United States building services
|
2,110,129
|
|
|
24
|
%
|
|
2,106,872
|
|
|
23
|
%
|
United States industrial services
|
797,447
|
|
|
9
|
%
|
|
1,087,543
|
|
|
12
|
%
|
Total United States operations
|
8,366,498
|
|
|
95
|
%
|
|
8,751,352
|
|
|
95
|
%
|
United Kingdom building services
|
430,563
|
|
|
5
|
%
|
|
423,259
|
|
|
5
|
%
|
Total operations
|
$
|
8,797,061
|
|
|
100
|
%
|
|
$
|
9,174,611
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
As described in more detail below, revenues for the year ended December 31, 2020 decreased to $8.80 billion compared to $9.17 billion for the year ended December 31, 2019. Revenue declines within our United States industrial services segment and our United States electrical construction and facilities services segment, largely as a result of a decrease in demand for our service offerings within the oil and gas and related industrial markets, were partially offset by revenue growth within our United States mechanical construction and facilities services segment, our United States building services segment, and our United Kingdom building services segment. Companies acquired in 2020 and 2019, which are reported in our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment and our United States building services segment, generated incremental revenues of $269.6 million in 2020.
Revenues of our United States electrical construction and facilities services segment were $1,973.4 million for the year ended December 31, 2020 compared to revenues of $2,216.6 million for the year ended December 31, 2019. The decrease in revenues was attributable to: (a) a reduction in industrial project activities within the manufacturing market sector due to adverse market conditions within the oil and gas industry, as previously referenced, (b) a decline in revenues from construction projects within the commercial market sector, as a result of the completion or substantial completion of certain projects, and (c) the effects of the COVID-19 pandemic on our operations, which resulted in: (i) a decrease in the number of short duration projects and (ii) project delays or access restrictions resulting from the various containment and mitigation measures mandated by certain of our customers and/or governmental authorities. The results for the year ended December 31, 2020 included $25.4 million of incremental revenues generated by a company acquired in 2019.
Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2020 were $3,485.5 million, a $145.2 million increase compared to revenues of $3,340.3 million for the year ended December 31, 2019. The results for the year ended December 31, 2020 included $188.8 million of incremental revenues generated by companies acquired in 2019. Excluding the impact of acquisitions, revenues of this segment decreased by $43.7 million, primarily as a result of a decline in revenues from: (a) the manufacturing market sector, inclusive of certain large food processing construction projects, and (b) several telecommunications and technology projects. Similar to our United States electrical construction and facilities services segment, revenues of this segment were negatively impacted by the effects of the COVID-19 pandemic, which resulted in project delays and temporary job site shutdowns, as well as a decrease in the number of short duration projects. These revenue reductions were partially offset by increased revenues from the majority of the remaining market sectors in which we operate, most notably the institutional, transportation, and commercial market sectors.
Revenues of our United States building services segment were $2,110.1 million and $2,106.9 million for the years ended December 31, 2020 and 2019, respectively. Excluding acquisition revenues of $55.4 million, this segment’s revenues decreased by approximately $52.1 million during the year ended December 31, 2020. Such reduction in revenues was primarily attributable to: (a) decreased project and controls activities within our mobile mechanical services operations, largely as a result of the impact of the COVID-19 pandemic, which resulted in fewer project opportunities given the temporary closure of certain customer facilities, (b) decreased large project activity within our energy services operations, primarily as a result of the completion of certain projects which were active in the prior year, and (c) the loss of certain contracts not renewed pursuant to rebid within our government services business. These revenue declines were partially offset by increased customer demand for certain services aimed at improving the indoor air quality within their facilities as well as an increase in revenues within our commercial site-based services operations, as a result of new contract awards and scope expansion on certain contracts with existing customers.
Revenues of our United States industrial services segment for the year ended December 31, 2020 were $797.4 million, a $290.1 million decrease compared to revenues of $1,087.5 million for the year ended December 31, 2019. Revenues of this segment for the year ended December 31, 2020 were negatively impacted by adverse market conditions including unprecedented volatility in the price of crude oil, largely as a result of a decline in demand caused by the COVID-19 pandemic. Such macroeconomic conditions led to a decrease in demand for our services, which resulted in: (a) a decrease in maintenance and capital project activity within our field services operations and (b) a reduction in new build heat exchanger sales and a decrease in maintenance, repair, and hydro blast cleaning services within our shop services operations. In addition, revenues for the year ended December 31, 2020 were negatively impacted by project stoppages resulting from hurricanes, including certain named storms, within the Gulf Coast region.
Our United Kingdom building services segment revenues were $430.6 million in 2020 compared to $423.3 million in 2019. The increase in revenues within this segment was primarily attributable to: (a) an increase in revenues from new maintenance contract awards within the commercial market sector, and (b) increased project activity with existing customers, primarily within the water and wastewater market sector, despite reduced opportunities for project work brought upon by the temporary closure of certain customer facilities and the temporary suspension of capital spending as a result of the COVID-19 pandemic in the first half of 2020. This segment’s revenues were positively impacted by $2.3 million related to the effect of favorable exchange rates for the British pound versus the United States dollar.
Cost of sales and Gross profit
The following table presents cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) for the years ended December 31, 2020 and 2019 (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Cost of sales
|
$
|
7,401,679
|
|
|
$
|
7,818,743
|
|
Gross profit
|
$
|
1,395,382
|
|
|
$
|
1,355,868
|
|
Gross profit margin
|
15.9
|
%
|
|
14.8
|
%
|
Our gross profit for the year ended December 31, 2020 was $1,395.4 million, a $39.5 million increase compared to gross profit of $1,355.9 million for the year ended December 31, 2019. Our gross profit margin was 15.9% and 14.8% for 2020 and 2019, respectively. The increase in gross profit for the year ended December 31, 2020 was a result of an increase in gross profit from our United States mechanical construction and facilities services segment and our United Kingdom building services segment. The increase in gross profit margin was predominantly attributable to improved operating performance within both of our United States construction segments, as described in further detail below.
Selling, general and administrative expenses
The following table presents selling, general and administrative expenses and SG&A margin (selling, general and administrative expenses as a percentage of revenues) for the years ended December 31, 2020 and 2019 (in thousands, except for percentages):
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|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Selling, general and administrative expenses
|
$
|
903,584
|
|
|
$
|
893,453
|
|
Selling, general and administrative expenses as a percentage of revenues
|
10.3
|
%
|
|
9.7
|
%
|
Our selling, general and administrative expenses for the year ended December 31, 2020 were $903.6 million compared to selling, general and administrative expenses of $893.5 million for the year ended December 31, 2019. For the year ended December 31, 2020, selling, general and administrative expenses included $29.6 million of incremental expenses directly related to companies acquired in 2020 and 2019, including amortization expense attributable to identifiable intangible assets of $9.5 million. Excluding incremental expenses from businesses acquired, our selling, general and administrative expenses decreased by $19.4 million, primarily as a result of certain cost reductions resulting from, or actions taken in response to, the COVID-19 pandemic, including: (a) a reduction in certain discretionary spending, such as travel and entertainment costs, (b) a decrease in salary expense due to: (i) a reduction in headcount, resulting from lower revenues than in the same prior year period, and (ii) certain short-term cost cutting measures, including temporary furloughs and salary reductions, and (c) a decrease in employee benefit costs, partially due to a decline in medical claims. These cost reductions were partially offset by an increase in incentive compensation expense, predominantly within our United States mechanical construction and facilities services segment, due to improved operating performance by several of our subsidiaries when compared to the prior year.
Selling, general and administrative expenses as a percentage of revenues were 10.3% and 9.7% for 2020 and 2019, respectively. The increase in SG&A margin for the year ended December 31, 2020 was primarily due to a reduction in revenues without a commensurate decrease in certain of our overhead costs, including: (a) certain fixed costs within our United States industrial services segment, despite the significant revenue decline within such segment, and (b) the above referenced increase in incentive compensation expense.
Restructuring expenses
Restructuring expenses, relating to employee severance obligations, were $2.2 million and $1.5 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the balance of restructuring related obligations yet to be paid was $2.7 million and $1.6 million, respectively. The obligations outstanding as of December 31, 2020 will be paid pursuant to our contractual obligations through 2022. No material expenses in connection with restructuring are expected to be incurred during 2021.
Impairment loss on goodwill, identifiable intangible assets, and other long-lived assets
During the second quarter of 2020, we identified certain indicators of impairment resulting from the aforementioned uncertainties caused by the COVID-19 pandemic and the significant volatility in the price of crude oil. These uncertainties have resulted in lower forecasted revenue and operating margin expectations for those of our businesses that are highly dependent on the strength of the oil and gas and related industrial markets, resulting in the recognition of impairment charges totaling $232.8 million during the three months ended June 30, 2020. Of this amount, $230.3 million related to our United States industrial services segment and was comprised of: (a) $225.5 million related to goodwill, (b) $4.2 million associated with a subsidiary trade name, and (c) $0.6 million related to certain long-lived assets. The remaining $2.5 million represented a subsidiary trade name impairment within our United States electrical construction and facilities services segment. No additional impairment charges were recorded during the remainder of 2020 and no impairment of our goodwill, identifiable intangible assets, or other long-lived assets was recognized during the year ended December 31, 2019.
Operating income (loss)
The following table presents by segment our operating income (loss) and each segment’s operating income (loss) as a percentage of such segment’s revenues from unrelated entities for the years ended December 31, 2020 and 2019 (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Segment
Revenues
|
|
2019
|
|
% of
Segment
Revenues
|
Operating income (loss):
|
|
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
166,501
|
|
|
8.4
|
%
|
|
$
|
161,684
|
|
|
7.3
|
%
|
United States mechanical construction and facilities services
|
292,536
|
|
|
8.4
|
%
|
|
225,040
|
|
|
6.7
|
%
|
United States building services
|
113,431
|
|
|
5.4
|
%
|
|
114,754
|
|
|
5.4
|
%
|
United States industrial services
|
(2,788)
|
|
|
(0.3)
|
%
|
|
44,340
|
|
|
4.1
|
%
|
Total United States operations
|
569,680
|
|
|
6.8
|
%
|
|
545,818
|
|
|
6.2
|
%
|
United Kingdom building services
|
20,660
|
|
|
4.8
|
%
|
|
18,323
|
|
|
4.3
|
%
|
Corporate administration
|
(98,542)
|
|
|
—
|
|
|
(101,726)
|
|
|
—
|
|
Restructuring expenses
|
(2,214)
|
|
|
—
|
|
|
(1,523)
|
|
|
—
|
|
Impairment loss on goodwill, identifiable intangible assets,
and other long-lived assets
|
(232,750)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total operations
|
256,834
|
|
|
2.9
|
%
|
|
460,892
|
|
|
5.0
|
%
|
Other corporate items:
|
|
|
|
|
|
|
|
Net periodic pension (cost) income
|
2,980
|
|
|
|
|
1,553
|
|
|
|
Interest expense
|
(9,009)
|
|
|
|
|
(13,821)
|
|
|
|
Interest income
|
1,521
|
|
|
|
|
2,265
|
|
|
|
Income from continuing operations before income taxes
|
$
|
252,326
|
|
|
|
|
$
|
450,889
|
|
|
|
As described in more detail below, operating income was $256.8 million, or 2.9% of revenues, for the year ended December 31, 2020, compared to operating income of $460.9 million, or 5.0% of revenues, for the year ended December 31, 2019. Our operating results for 2020 included $232.8 million of non-cash impairment charges recorded during the second quarter, which negatively impacted the Company’s full year operating margin in 2020 by approximately 270 basis points. Excluding the impact of such impairments, operating income and operating margin for the twelve months ended December 31, 2020 increased by $28.7 million and 60 basis points, primarily as a result of favorable execution within our United States construction segments. Companies acquired in 2020 and 2019, which are reported in our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, and our United States building services segment, generated incremental operating income of $15.4 million, inclusive of $16.0 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2020.
Operating income of our United States electrical construction and facilities services segment for the year ended December 31, 2020 was $166.5 million, or 8.4% of revenues, compared to operating income of $161.7 million, or 7.3% of revenues, for the year ended December 31, 2019. A company acquired in 2019 contributed incremental operating income of $1.6 million, inclusive of $0.1 million of amortization expense associated with identifiable intangible assets, during 2020. The year-over-year increase in operating income was largely attributable to a reduction in selling, general and administrative expenses, including a curtailment in certain discretionary spending, such as travel and entertainment costs, and a decrease in employee benefit costs, resulting from a decline in medical claims. Despite an increase in gross profit from project activities within the commercial market sector, driven by several telecommunication construction projects, this segment experienced a marginal reduction in annual gross profit given: (a) a decrease in gross profit within the manufacturing market sector due to a reduction in industrial project activities resulting from the adverse market conditions within the oil and gas industry, (b) a decline in gross profit from short duration project activities, given the effects of the COVID-19 pandemic, which led to fewer short duration project opportunities, and (c) the under absorption of certain indirect costs due to the overall reduction in segment revenues. The increase in operating margin for the year ended December 31, 2020 was a result of an increase in gross profit margin given favorable project execution and a more profitable mix of work within this segment. These gross profit margin improvements were partially offset by an increase in the ratio of selling, general and administrative expenses to revenues, as a result of the revenue declines experienced by this segment during 2020.
Our United States mechanical construction and facilities services segment’s operating income for the year ended December 31, 2020 was $292.5 million, a $67.5 million increase compared to operating income of $225.0 million for the year ended December 31, 2019. Companies acquired in 2019 contributed incremental operating income of $9.3 million, inclusive of $12.7 million of amortization expense associated with identifiable intangible assets for the year ended December 31, 2020. Excluding the impact of businesses acquired, annual operating income of this segment increased by approximately $58.2 million. Despite the disruption caused by the COVID-19 pandemic during 2020, our United States mechanical construction and facilities services segment experienced an increase in gross profit from construction projects within the majority of the market sectors in which we operate. Operating margins within this segment for the years ended December 31, 2020 and 2019 were 8.4% and 6.7%, respectively. The year-over-year increase in operating margin for this segment was attributable to an increase in gross profit margin, primarily within: (a) the manufacturing market sector, driven by certain large food processing construction projects, and (b) the commercial market sector, inclusive of a number of technology projects, which reached substantial completion during the year. The increases in gross profit and gross profit margin were partially offset by an increase in selling, general and administrative expenses, as well as the ratio of selling, general and administrative expenses to revenues, largely as a result of an increase in incentive compensation expense due to the improved year-over-year operating performance and an increase in amortization expense associated with identifiable intangible assets resulting from companies acquired in 2019.
Operating income of our United States building services segment was $113.4 million in 2020, compared to $114.8 million in 2019. Operating margin of this segment was 5.4% in both periods. Companies acquired in 2020, which are included within this segment’s mobile mechanical services division, contributed incremental operating income of $4.5 million, inclusive of $3.2 million of amortization expense associated with identifiable intangible assets. The decrease in segment operating income for the year ended December 31, 2020 was primarily due to a decrease in gross profit resulting from: (a) a reduction in large project activity within our energy services operations, and (b) when excluding the impact of acquired businesses, reduced project and controls activities within our mobile mechanical services operations, largely as a result of the temporary closure of certain customer facilities impacted by the COVID-19 pandemic. These gross profit reductions were partially offset by increased gross profit from service repair and maintenance activities within our mobile mechanical services operations, partially as a result of increased customer demand for certain services aimed at improving the indoor air quality within their facilities. Operating income of this segment additionally benefited from an overall decrease in selling, general and administrative expenses due to certain cost reduction measures enacted during the year.
Our United States industrial services segment reported an operating loss of $2.8 million for the year ended December 31, 2020 compared to operating income of $44.3 million for the year ended December 31, 2019. Operating margin of this segment was (0.3)% and 4.1% for 2020 and 2019, respectively. As previously referenced, this segment’s results for the year ended December 31, 2020 were severely impacted by adverse macroeconomic factors impacting the oil and gas industry. As a result of such conditions, this segment experienced a reduction in gross profit from both our field services and shop services operations due to: (a) a decrease in demand for our service offerings, (b) the deferral, curtailment, or cancellation of previously scheduled projects with certain customers, and (c) an unfavorable mix of work, which included a greater number of projects with lower than typical gross profit margins. The aforementioned decrease in gross profit was partially offset by a reduction in selling, general and administrative expenses during the year, including: (a) incentive compensation and salaries, (b) employee benefit costs, and (c) certain discretionary spending, such as travel and entertainment costs. The decrease in operating margin for the year ended December 31, 2020 was attributable to a decrease in gross profit margin resulting from the above noted factors, as well as an increase in the ratio of selling, general and administrative expenses to revenues due to a decrease in revenue without a commensurate decrease in certain of this segment’s fixed overhead costs.
Our United Kingdom building services segment operating income for the year ended December 31, 2020 was $20.7 million, or 4.8% of revenues, which compares favorably to operating income of $18.3 million, or 4.3% of revenues, for the year ended December 31, 2019. The increase in annual operating income of this segment was primarily a result of incremental gross profit from new maintenance contract awards. Exchange rate movements for the British pound versus the United States dollar did not have a significant impact on this segment’s operating income for the twelve months ended December 31, 2020. The year-over-year increase in this segment’s operating margin was attributable to an increase in gross profit margin, primarily as a result of a more favorable mix of work, and a decrease in the ratio of selling, general and administrative expenses to revenues.
Our corporate administration operating loss was $98.5 million for 2020 compared to $101.7 million in 2019. The decrease in corporate administration expenses for the year ended December 31, 2020 was primarily due to: (a) a decrease in long-term incentive compensation expense, (b) a decrease in salary expense as a result of: (i) certain short-term cost cutting measures, including temporary furloughs and salary reductions, and (ii) permanent headcount reductions resulting from the realignment of certain of our back office functions, (c) curtailment in certain discretionary spending, such as travel and entertainment costs, and (d) a reduction in professional fees.
Non-operating items
Interest expense was $9.0 million and $13.8 million for 2020 and 2019, respectively. Interest income was $1.5 million and $2.3 million for 2020 and 2019, respectively. The decrease in both interest expense and interest income for 2020 resulted from lower interest rates. The decrease in interest expense was partially offset by the impact of higher average outstanding borrowings.
Our income tax provision for the year ended December 31, 2020 was $119.4 million based on an income tax rate of 47.3%, compared to an income tax provision and an income tax rate of $125.7 million and 27.9%, respectively, for the year ended December 31, 2019. Our income tax rate and income tax provision for 2020 were impacted by the tax-effect of the $232.8 million of non-cash goodwill, identifiable intangible asset, and other long-lived asset impairment charges recorded during the second quarter, the majority of which is non-deductible for tax purposes.
Remaining Unsatisfied Performance Obligations
The following table presents the transaction price allocated to remaining unsatisfied performance obligations (“remaining performance obligations”) for each of our reportable segments and their respective percentage of total remaining performance obligations (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
% of Total
|
|
December 31,
2019
|
|
% of Total
|
Remaining performance obligations:
|
|
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
1,087,238
|
|
|
24
|
%
|
|
$
|
1,036,216
|
|
|
26
|
%
|
United States mechanical construction and facilities services
|
2,673,293
|
|
|
58
|
%
|
|
2,229,090
|
|
|
55
|
%
|
United States building services
|
612,179
|
|
|
13
|
%
|
|
542,269
|
|
|
13
|
%
|
United States industrial services
|
91,237
|
|
|
2
|
%
|
|
104,613
|
|
|
3
|
%
|
Total United States operations
|
4,463,947
|
|
|
97
|
%
|
|
3,912,188
|
|
|
97
|
%
|
United Kingdom building services
|
130,673
|
|
|
3
|
%
|
|
124,176
|
|
|
3
|
%
|
Total operations
|
$
|
4,594,620
|
|
|
100
|
%
|
|
$
|
4,036,364
|
|
|
100
|
%
|
Remaining performance obligations increase with awards of new contracts and decrease as we perform work and recognize revenue on existing contracts. We include a project within our remaining performance obligations at such time as the project is awarded and agreement on contract terms has been reached. Our remaining performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of the total transaction price can be made.
Remaining performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of our construction contracts are subject to cancellation at the election of our customers, in accordance with industry practice, we do not limit the amount of unrecognized revenue included within remaining performance obligations for these contracts as the risk of cancellation is very low due to the inherent substantial economic penalty that our customers would incur upon cancellation or termination. We believe our reported remaining performance obligations for our construction contracts are firm and contract cancellations have not had a material adverse effect on us.
Remaining performance obligations also include unrecognized revenues expected to be realized over the remaining term of service contracts. However, to the extent a service contract includes a cancellation clause which allows for the termination of such contract by either party without a substantive penalty, the remaining contract term, and therefore, the amount of unrecognized revenues included within remaining performance obligations, is limited to the notice period required for the termination.
Our remaining performance obligations are comprised of: (a) original contract amounts, (b) change orders for which we have received written confirmations from our customers, (c) pending change orders for which we expect to receive confirmations in the ordinary course of business, (d) claim amounts that we have made against customers for which we have determined we have a legal basis under existing contractual arrangements and as to which the variable consideration constraint does not apply, and (e) other forms of variable consideration to the extent that such variable consideration has been included within the transaction price of our contracts. Such claim and other variable consideration amounts were immaterial for all periods presented.
Our remaining performance obligations at December 31, 2020 were $4.59 billion compared to $4.04 billion at December 31, 2019. The increase in remaining performance obligations at December 31, 2020 was attributable to an increase in remaining performance obligations within all of our reportable segments, except for our United States industrial services segment.
Computer System Attack
On February 15, 2020, we became aware of an infiltration and encryption of portions of our information technology network. This attack temporarily disrupted our use of the impacted systems. As part of our investigation into this incident, we engaged outside security experts, who did not identify any exfiltration of customer or employee data or any inappropriate access to our accounting or finance systems. The Company maintains insurance coverage for these types of incidents; such policies, however, may not completely provide coverage for, or completely offset the costs of, this infiltration.
2019 versus 2018
Overview
The following table presents selected financial data for the fiscal years ended December 31, 2019 and 2018 (in thousands, except percentages and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Revenues
|
$
|
9,174,611
|
|
|
$
|
8,130,631
|
|
Revenues increase from prior year
|
12.8
|
%
|
|
5.8
|
%
|
Gross profit
|
$
|
1,355,868
|
|
|
$
|
1,205,453
|
|
Gross profit as a percentage of revenues
|
14.8
|
%
|
|
14.8
|
%
|
Restructuring expenses
|
$
|
1,523
|
|
|
$
|
2,306
|
|
Impairment loss on goodwill, identifiable intangible assets, and other long-lived assets
|
$
|
—
|
|
|
$
|
907
|
|
Operating income
|
$
|
460,892
|
|
|
$
|
403,083
|
|
Operating income as a percentage of revenues
|
5.0
|
%
|
|
5.0
|
%
|
Net income attributable to EMCOR Group, Inc.
|
$
|
325,140
|
|
|
$
|
283,531
|
|
Diluted earnings per common share from continuing operations
|
$
|
5.75
|
|
|
$
|
4.89
|
|
The results of our operations for 2019 set new company records in terms of revenues, operating income, net income attributable to EMCOR Group, Inc., and diluted earnings per share from continuing operations. Operating margin (operating income as a percentage of revenues) for 2019 remained consistent with our previously established annual record of 5.0%.
Revenues increased by 12.8% from $8.13 billion for the year ended December 31, 2018 to $9.17 billion for the year ended December 31, 2019. Operating income for 2019 of $460.9 million, or 5.0% of revenues, increased by $57.8 million compared to operating income of $403.1 million, or 5.0% of revenues, in 2018.
The strong operating results in 2019 were due to revenue growth and an increase in operating income within all of our reportable segments, as well as operating margin expansion across all such segments, except for our United States mechanical construction and facilities services segment due to a change in revenue mix when compared to 2018.
Impact of Acquisitions
On November 1, 2019, we completed the acquisition of Batchelor & Kimball, Inc. (“BKI”), a leading full service provider of mechanical construction and maintenance services. This acquisition strengthens our position and broadens our capabilities in the Southern and Southeastern regions of the United States, and the results of its operations have been included within our United States mechanical construction and facilities services segment. In addition to BKI, during 2019, we acquired: (a) a company that provides electrical contracting services in central Iowa, the results of operations of which have been included within our United States electrical construction and facilities services segment, (b) a company that provides mechanical contracting services in south-central and eastern Texas, the results of operations of which have been included within our United States mechanical construction and facilities services segment, and (c) four companies included within our United States building services segment, consisting of: (i) a company that provides mobile mechanical services in the Southern region of the United States and (ii) three companies, the results of operations of which were de minimis, which bolster our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions.
We acquired four companies in 2018. Two companies provide mobile mechanical services, one within the Eastern region and the other within the Western region of the United States. The third company is a full service provider of mechanical services within the Southern region of the United States. The results of operations for these three companies have been included in our United States building services segment. The fourth company provides electrical construction and maintenance services for industrial and commercial buildings in North Texas, and the results of its operations have been included in our United States electrical construction and facilities services segment.
Companies acquired in 2019 and 2018 generated incremental revenues of $290.3 million and incremental operating income of $16.6 million, inclusive of $9.3 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2019.
Discussion and Analysis of Results of Operations
Revenues
The following table presents our revenues for each of our operating segments and the approximate percentages that each segment’s revenues were of total revenues for the years ended December 31, 2019 and 2018 (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
Revenues from unrelated entities:
|
|
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
2,216,600
|
|
|
24
|
%
|
|
$
|
1,954,323
|
|
|
24
|
%
|
United States mechanical construction and facilities services
|
3,340,337
|
|
|
36
|
%
|
|
2,962,843
|
|
|
37
|
%
|
United States building services
|
2,106,872
|
|
|
23
|
%
|
|
1,875,485
|
|
|
23
|
%
|
United States industrial services
|
1,087,543
|
|
|
12
|
%
|
|
923,109
|
|
|
11
|
%
|
Total United States operations
|
8,751,352
|
|
|
95
|
%
|
|
7,715,760
|
|
|
95
|
%
|
United Kingdom building services
|
423,259
|
|
|
5
|
%
|
|
414,871
|
|
|
5
|
%
|
Total operations
|
$
|
9,174,611
|
|
|
100
|
%
|
|
$
|
8,130,631
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
As described in more detail below, revenues for the year ended December 31, 2019 increased to $9.17 billion compared to $8.13 billion for the year ended December 31, 2018, with all reportable segments experiencing revenue growth year-over-year. Companies acquired in 2019 and 2018, which are reported in our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment and our United States building services segment, generated incremental revenues of $290.3 million in 2019.
Revenues of our United States electrical construction and facilities services segment were $2,216.6 million for the year ended December 31, 2019 compared to revenues of $1,954.3 million for the year ended December 31, 2018. The increase in revenues was attributable to: (a) an increase in revenues from the commercial market sector, primarily as a result of several large telecommunication construction projects, and (b) an increase in project activities within the manufacturing and institutional market sectors. In addition, the results for the year ended December 31, 2019 included $134.5 million of incremental revenues generated by companies acquired in 2019 and 2018. These increases were partially offset by a decrease in revenues due to the completion or substantial completion of certain large construction projects within the transportation, healthcare, and hospitality market sectors.
Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2019 were $3,340.3 million, a $377.5 million increase compared to revenues of $2,962.8 million for the year ended December 31, 2018. The increase in revenues was primarily attributable to an increase in revenues from the majority of the market sectors in which we operate, including: (a) the manufacturing market sector, due to several food processing construction projects, (b) the commercial market sector, primarily as a result of certain telecommunication and technology construction projects in process during 2019, and (c) the healthcare, water and wastewater, and institutional market sectors due to increased project activity. In addition, the results for the year ended December 31, 2019 included $49.1 million of incremental revenues generated by companies acquired in 2019. These increases were partially offset by decreased revenues within the hospitality market sector as a result of the completion of certain large projects.
Revenues of our United States building services segment were $2,106.9 million and $1,875.5 million for the years ended December 31, 2019 and 2018, respectively. The $231.4 million increase in this segment’s revenues was due to: (a) incremental revenues of $106.7 million generated by companies acquired in 2019 and 2018 within our mobile mechanical services operations, (b) greater project, controls, and service repair and maintenance activities within our mobile mechanical services operations, (c) an increase in revenues within our commercial site-based services operations, partially as a result of: (i) scope expansion on certain contracts with existing customers and (ii) new contract awards, and (d) increased large project activity within our energy services operations. These increases were partially offset by revenue declines within our government site-based services operations due to the loss of certain contracts not renewed pursuant to rebid, which resulted in a reduction in both base maintenance and indefinite-delivery, indefinite-quantity project revenues.
Revenues of our United States industrial services segment for the year ended December 31, 2019 were $1,087.5 million, a $164.4 million increase compared to revenues of $923.1 million for the year ended December 31, 2018. The increase in revenues was primarily due to increased maintenance and capital project activity within our field services operations. In addition, the results for the year ended December 31, 2019 benefited from a more normalized demand pattern for our turnaround services as compared to 2018, which was negatively impacted by the lingering effects of Hurricane Harvey, which led to the cancellation or deferral of certain previously scheduled maintenance activities with our customers. The increased revenues for the year ended December 31, 2019 were partially offset by a decrease in revenues from our shop services operations, primarily as a result of a reduction in new build heat exchanger sales.
Our United Kingdom building services segment revenues were $423.3 million in 2019 compared to $414.9 million in 2018. The increase in revenues within this segment was primarily the result of: (a) new contract awards within the commercial and institutional market sectors and (b) increased project activity with existing customers. Unfavorable exchange rates for the British pound versus the United States dollar negatively impacted this segment’s revenues for the year ended December 31, 2019 by $19.5 million.
Cost of sales and Gross profit
The following table presents cost of sales, gross profit, and gross profit margin for the years ended December 31, 2019 and 2018 (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Cost of sales
|
$
|
7,818,743
|
|
|
$
|
6,925,178
|
|
Gross profit
|
$
|
1,355,868
|
|
|
$
|
1,205,453
|
|
Gross profit margin
|
14.8
|
%
|
|
14.8
|
%
|
Our gross profit for the year ended December 31, 2019 was $1,355.9 million, a $150.4 million increase compared to gross profit of $1,205.5 million for the year ended December 31, 2018. Our gross profit margin was 14.8% for 2019 and 2018. The increase in consolidated gross profit was due to an increase in gross profit from all of our reportable segments, partially as a result of an increase in revenues within each segment during 2019. Additionally, gross profit within our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, and our United States building services segment was favorably impacted by incremental gross profit generated by companies acquired.
Selling, general and administrative expenses
The following table presents selling, general and administrative expenses and SG&A margin, for the years ended December 31, 2019 and 2018 (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Selling, general and administrative expenses
|
$
|
893,453
|
|
|
$
|
799,157
|
|
Selling, general and administrative expenses as a percentage of revenues
|
9.7
|
%
|
|
9.8
|
%
|
Our selling, general and administrative expenses for the year ended December 31, 2019 were $893.5 million, a $94.3 million increase compared to selling, general and administrative expenses of $799.2 million for the year ended December 31, 2018. Selling, general and administrative expenses as a percentage of revenues were 9.7% and 9.8% for 2019 and 2018, respectively. The increase in selling, general and administrative expenses for the year ended December 31, 2019 included $35.1 million of incremental expenses directly related to companies acquired in 2019 and 2018, including amortization expense attributable to identifiable intangible assets of $4.5 million. In addition to the impact of acquisitions, selling, general and administrative expenses increased due to: (a) an increase in salaries and related employee benefit costs, partially as a result of an increase in headcount to support our revenue growth, (b) an increase in incentive compensation expense, due to higher annual operating results than in 2018, (c) an increase in information technology costs related to various initiatives in process during 2019, and (d) an increase in certain non-income based taxes. The decrease in SG&A margin for the year ended December 31, 2019 was primarily due to an increase in revenues without commensurate increases in our overhead cost structure.
Restructuring expenses
Restructuring expenses, primarily relating to employee severance obligations, were $1.5 million and $2.3 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the balance of restructuring related obligations yet to be paid was $1.6 million.
Impairment loss on goodwill, identifiable intangible assets, and other long-lived assets
No impairment of our identifiable intangible assets was recognized for the year ended December 31, 2019. During 2018, we recorded a $0.9 million non-cash impairment charge associated with a finite-lived subsidiary trade name within our United States industrial services segment. No impairment of our goodwill was recognized for the years ended December 31, 2019 and 2018.
Operating income (loss)
The following table presents by segment our operating income (loss) and each segment’s operating income (loss) as a percentage of such segment’s revenues from unrelated entities for the years ended December 31, 2019 and 2018 (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
% of
Segment
Revenues
|
|
2018
|
|
% of
Segment
Revenues
|
Operating income (loss):
|
|
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
161,684
|
|
|
7.3
|
%
|
|
$
|
139,430
|
|
|
7.1
|
%
|
United States mechanical construction and facilities services
|
225,040
|
|
|
6.7
|
%
|
|
219,853
|
|
|
7.4
|
%
|
United States building services
|
114,754
|
|
|
5.4
|
%
|
|
93,827
|
|
|
5.0
|
%
|
United States industrial services
|
44,340
|
|
|
4.1
|
%
|
|
27,671
|
|
|
3.0
|
%
|
Total United States operations
|
545,818
|
|
|
6.2
|
%
|
|
480,781
|
|
|
6.2
|
%
|
United Kingdom building services
|
18,323
|
|
|
4.3
|
%
|
|
15,930
|
|
|
3.8
|
%
|
Corporate administration
|
(101,726)
|
|
|
—
|
|
|
(90,415)
|
|
|
—
|
|
Restructuring expenses
|
(1,523)
|
|
|
—
|
|
|
(2,306)
|
|
|
—
|
|
Impairment loss on goodwill, identifiable intangible assets,
and other long-lived assets
|
—
|
|
|
—
|
|
|
(907)
|
|
|
—
|
|
Total operations
|
460,892
|
|
|
5.0
|
%
|
|
403,083
|
|
|
5.0
|
%
|
Other corporate items:
|
|
|
|
|
|
|
|
Net periodic pension (cost) income
|
1,553
|
|
|
|
|
2,743
|
|
|
|
Interest expense
|
(13,821)
|
|
|
|
|
(13,544)
|
|
|
|
Interest income
|
2,265
|
|
|
|
|
2,746
|
|
|
|
Income from continuing operations before income taxes
|
$
|
450,889
|
|
|
|
|
$
|
395,028
|
|
|
|
As described in more detail below, we had operating income of $460.9 million for the year ended December 31, 2019 compared to operating income of $403.1 million for the year ended December 31, 2018. Operating margin was 5.0% for both periods. Operating income and operating margin increased within all of our reportable segments except, in the case of operating margin, our United States mechanical construction and facilities services segment, which experienced a 0.7% decline in operating margin as a result of a change in revenue mix compared to 2018.
Operating income of our United States electrical construction and facilities services segment for the year ended December 31, 2019 was $161.7 million, or 7.3% of revenues, compared to operating income of $139.4 million, or 7.1% of revenues, for the year ended December 31, 2018. The $22.3 million increase in operating income year-over-year was primarily attributable to an increase in gross profit within the commercial market sector, inclusive of certain telecommunication construction projects, partially offset by a decrease in gross profit within the transportation market sector as a result of the completion or substantial completion of certain multi-year construction projects. Additionally, companies acquired in 2019 and 2018 contributed incremental operating income of $6.1 million, inclusive of $1.7 million of amortization expense associated with identifiable intangible assets. The increase in operating margin for 2019 was attributable to an increase in gross profit margin, partially as a result of improved project execution.
Our United States mechanical construction and facilities services segment’s operating income for the year ended December 31, 2019 was $225.0 million, a $5.2 million increase compared to operating income of $219.9 million for the year ended December 31, 2018. Companies acquired in 2019 contributed incremental operating income of $0.1 million, inclusive of $2.8 million of amortization expense associated with identifiable intangible assets. The increase in operating income for 2019 was primarily attributable to an increase in gross profit from activities within the commercial and institutional market sectors, partially offset by a decrease in gross profit from construction projects within the manufacturing and hospitality market sectors. Operating margins within this segment for the years ended December 31, 2019 and 2018 were 6.7% and 7.4%, respectively.
The decrease in annual operating margin was attributable to a decrease in gross profit margin, primarily within the manufacturing market sector as a result of a change in the mix of work year-over-year, including several large food processing projects that had not achieved key milestones and were therefore being recognized at lower gross profit margins. This segment’s operating margin for 2018 was favorably impacted by the successful close-out of certain large manufacturing and hospitality construction projects.
Operating income of our United States building services segment was $114.8 million, or 5.4% of revenues, and $93.8 million, or 5.0% of revenues, in 2019 and 2018, respectively. The increase in operating income for the year ended December 31, 2019 was primarily attributable to our mobile mechanical services operations, as a result of increased gross profit from project, controls, and service repair and maintenance activities. In addition, operating income benefited from increased gross profit within our commercial site-based services operations, as a result of scope expansion on certain existing contracts, and our energy services operations, due to an increase in large project activity. Companies acquired in 2019 and 2018 contributed incremental operating income of $10.4 million, inclusive of $4.8 million of amortization expense associated with identifiable intangible assets. These increases were partially offset by a reduction in operating income from our government site-based services operations as a result of a decrease in gross profit due to the loss of certain contracts within their portfolio, which were not renewed pursuant to rebid. The increase in operating margin of this segment for the year ended December 31, 2019 was attributable to an increase in gross profit margin, primarily from building automation and controls and repair project activities within our mobile mechanical services operations.
Our United States industrial services segment operating income for the year ended December 31, 2019 was $44.3 million, a $16.7 million increase compared to operating income of $27.7 million for the year ended December 31, 2018. Operating margin of this segment was 4.1% and 3.0% for 2019 and 2018, respectively. The increase in operating income for the year ended December 31, 2019 was primarily due to an increase in demand for our service offerings during the year as we experienced a more normalized demand pattern within our field services operations as compared to 2018. The increase in operating margin for the year ended December 31, 2019 was primarily attributable to a decrease in the ratio of selling, general and administrative expenses to revenues, partially as a result of an increase in revenues without commensurate increases in this segment’s overhead cost structure.
Our United Kingdom building services segment operating income for the year ended December 31, 2019 was $18.3 million, or 4.3% of revenues, compared to operating income of $15.9 million, or 3.8% of revenues, for the year ended December 31, 2018. Operating income increased primarily as a result of increased gross profit within the commercial market sector due to: (a) an increase in project activity with existing customers and (b) new contract awards. This segment’s operating income was negatively impacted by $0.9 million for the year ended December 31, 2019 related to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The increase in operating margin for the year ended December 31, 2019 was attributable to an increase in gross profit margin, partially as a result of a favorable project mix during the year.
Our corporate administration operating loss was $101.7 million for 2019 compared to $90.4 million in 2018. The increase in corporate administration expenses for the year ended December 31, 2019 was primarily due to: (a) an increase in employment costs, such as incentive compensation and salaries, (b) an increase in professional fees as a result of various information technology initiatives in process during 2019, and (c) an increase in certain non-income based taxes.
Non-operating items
Interest expense was $13.8 million and $13.5 million for 2019 and 2018, respectively. Interest income was $2.3 million and $2.7 million for 2019 and 2018, respectively. The increase in interest expense for 2019 was due to higher average interest rates, partially offset by the impact of reduced average outstanding borrowings. The decrease in interest income was a result of lower average daily cash balances during the first half of 2019.
Our 2019 income tax provision was $125.7 million compared to $109.1 million for 2018. Our income tax rate was 27.9% and 27.6% for 2019 and 2018, respectively. The increase in the 2019 income tax provision was primarily driven by increased income from continuing operations before income taxes while the increase in the income tax rate was a result of: (a) an increase in our state deferred tax rate, partially as a result of a change in the mix of income, and (b) the continued impact of the Tax Cuts and Jobs Act, including the application of guidance regarding certain permanent differences and other nondeductible expenses.
Discontinued operations
During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented in the Consolidated Financial Statements as discontinued operations.
Liquidity and Capital Resources
The following section discusses our principal liquidity and capital resources, as well as our primary liquidity requirements and sources and uses of cash. Our cash and cash equivalents are maintained in highly liquid investments with original maturity dates of three months or less.
Our short-term liquidity requirements primarily arise from: (a) working capital requirements, (b) business acquisitions, (c) share repurchases, (d) cash dividend payments, (e) interest and principal payments related to our outstanding indebtedness, (f) capital expenditures, and (g) income tax payments. We can expect to meet those requirements through our cash and cash equivalent balances, cash generated from our operations, and, if necessary, the borrowing capacity available under our revolving credit facility. However, negative macroeconomic trends, including prolonged impacts from the COVID-19 pandemic, could have an adverse effect on future liquidity if we experience delays in the payment of outstanding receivables beyond normal payment terms or an increase in credit losses. In addition, during economic downturns, there have typically been fewer small discretionary projects from the private sector and our competitors have aggressively bid larger long-term infrastructure and public sector contracts. Our short-term liquidity is also impacted by: (a) the type and length of construction contracts in place as performance of long duration contracts typically requires greater amounts of working capital, (b) the level of turnaround activities within our United States industrial services segment as such projects are billed in arrears pursuant to contractual terms that are standard within the industry, and (c) the billing terms of our maintenance contracts, including those within our United States and United Kingdom building services segments. While we strive to negotiate favorable billing terms, which allow us to invoice in advance of costs incurred on certain of our contracts, there can be no assurance that such terms will be agreed to by our customers.
Our long-term liquidity requirements can be expected to be met initially through cash generated from operating activities and, if necessary, the borrowing capacity available under our revolving credit facility. Based upon our current credit ratings and financial position, we can also reasonably expect to be able to secure long-term debt financing if required to achieve our strategic objectives. Over the long term, our primary revenue risk factor continues to be the level of demand for non-residential construction as well as building and industrial services, all of which are influenced by macroeconomic trends including interest rates and governmental economic policy. In addition, our ability to perform work is critical to meeting our long-term liquidity requirements.
Despite the economic uncertainty described above, we believe that we have sufficient financial resources available to meet our short-term and foreseeable long-term liquidity requirements.
Cash Flows
The following table presents our net cash provided by (used in) operating activities, investing activities, and financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Net cash provided by operating activities
|
$
|
806,366
|
|
|
$
|
355,700
|
|
|
$
|
271,011
|
|
Net cash used in investing activities
|
$
|
(94,863)
|
|
|
$
|
(345,339)
|
|
|
$
|
(117,722)
|
|
Net cash used in financing activities
|
$
|
(171,907)
|
|
|
$
|
(19,247)
|
|
|
$
|
(253,042)
|
|
Increase (decrease) in cash, cash equivalents, and restricted cash
|
$
|
543,642
|
|
|
$
|
(6,294)
|
|
|
$
|
(103,174)
|
|
For the year ended December 31, 2020, our cash balance, including cash equivalents and restricted cash, increased by approximately $543.6 million from $359.9 million at December 31, 2019 to $903.6 million at December 31, 2020. For the year ended December 31, 2019, our cash balance, including cash equivalents and restricted cash decreased by approximately $6.3 million from $366.2 million at December 31, 2018. Changes in our cash position can be characterized as follows:
Operating Activities – Operating cash flows generally represent our net income as adjusted for certain non-cash items and changes in assets and liabilities. For 2020, net cash provided by operating activities was $806.4 million compared to net cash provided by operating activities of $355.7 million in 2019 and $271.0 million in 2018.
The $450.7 million increase in net cash provided by operating activities during 2020, when compared to 2019, was primarily attributable to: (a) a decline in organic revenues within all our United States reportable segments, which resulted in a net reduction in outstanding accounts receivable, primarily within our United States industrial services segment and our United States electrical construction and facilities services segment, (b) a reduction in the payment of certain non-income based taxes resulting from various government measures enacted in response to the COVID-19 pandemic, including: (i) a $102.5 million reduction in the payment of certain payroll taxes given the enactment of the Coronavirus Aid, Relief, and Economic Security Act, which provided that employers may defer payment of the employer’s portion of Social Security taxes throughout 2020, with payment of such deferred amounts due in two equal installments in December of 2021 and December of 2022, and (ii) the deferral of nearly $15.0 million in value-added tax within our United Kingdom building services segment, payment of which is substantially due in 2021, and (c) the timing of invoicing to our customers, including advanced billings on our long-term construction contracts.
For 2019 compared to 2018, the $84.7 million increase in cash provided by operating activities was primarily due to: (a) a $41.6 million increase in net income and (b) the timing of cash receipts from our customers.
Investing Activities – Investing cash flows consist primarily of payments for the acquisition of businesses, capital expenditures, and proceeds from the sale or disposal of property, plant, and equipment. For 2020, we utilized approximately $94.9 million of cash for investing activities compared to $345.3 million in 2019 and $117.7 million in 2018. Year-over-year fluctuations in investing cash flows were primarily driven by increases or decreases in payments for acquisitions within the respective year.
Financing Activities – Financing cash flows consist primarily of the issuance and repayment of short-term and long-term debt, repurchases of common stock, payment of dividends to stockholders, and the issuance of common stock through certain employee equity plans. Net cash used in financing activities for 2020 was $171.9 million compared to $19.2 million in 2019 and $253.0 million in 2018.
The increase in cash used in financing activities in 2020, when compared to 2019, was primarily due to a $112.6 million increase in funds used for the repurchase of common stock and a net increase in repayments made on our revolving credit facility and term loan during 2020. The decrease in cash used for financing activities in 2019, when compared to 2018, was primarily a result of a $216.2 million decrease in funds used for the repurchase of our common stock and $25.0 million in net borrowings made under our revolving credit facility during 2019.
Debt
Until March 2, 2020, we had a credit agreement dated as of August 3, 2016, which provided for a $900.0 million revolving credit facility (the “2016 Revolving Credit Facility”) and a $400.0 million term loan (the “2016 Term Loan”) (collectively referred to as the “2016 Credit Agreement”). On March 2, 2020, we amended and restated the 2016 Credit Agreement to provide for a $1.3 billion revolving credit facility (the “2020 Revolving Credit Facility”) and a $300.0 million term loan (the “2020 Term Loan”) (collectively referred to as the “2020 Credit Agreement”) expiring March 2, 2025. We may increase the 2020 Revolving Credit Facility to $1.9 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $400.0 million of available capacity under the 2020 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries.
At the Company’s election, borrowings under the 2020 Credit Agreement bear interest at either: (1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2) United States dollar LIBOR (0.15% at December 31, 2020) plus 1.00% to 1.75%, based on certain financial tests. The base rate is determined by the greater of (a) the prime commercial lending rate announced by Bank of Montreal from time to time (3.25% at December 31, 2020), (b) the federal funds effective rate, plus ½ of 1.00%, (c) the daily one month LIBOR rate, plus 1.00%, or (d) 0.00%. The interest rate in effect at December 31, 2020 was 1.15%. A commitment fee is payable on the average daily unused amount of the 2020 Revolving Credit Facility, which ranges from 0.10% to 0.25%, based on certain financial tests. The fee was 0.10% of the unused amount as of December 31, 2020. Fees for letters of credit issued under the 2020 Revolving Credit Facility range from 0.75% to 1.75% of the respective face amounts of outstanding letters of credit, depending on the nature of the letter of credit, and are computed based on certain financial tests.
As of December 31, 2020 and 2019, the balance of the 2020 Term Loan and the 2016 Term Loan was $270.6 million and $254.4 million, respectively. As of December 31, 2020, there were no direct borrowings outstanding under the 2020 Revolving Credit Facility; however, we had $71.3 million of letters of credit outstanding, which reduce the available capacity under such facility. As of December 31, 2019, we had $50.0 million in direct borrowings outstanding and $109.0 million of letters of credit outstanding under the 2016 Revolving Credit Facility. We capitalized an additional $3.1 million of debt issuance costs associated with the 2020 Credit Agreement. Debt issuance costs are amortized over the life of the agreement and are included as part of interest expense.
Obligations under the 2020 Credit Agreement are guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets. The 2020 Credit Agreement contains various covenants providing for, among other things, the maintenance of certain financial ratios and certain limitations on the payment of dividends, common stock repurchases, investments, acquisitions, indebtedness, and capital expenditures. We were in compliance with all such covenants as of December 31, 2020 with respect to the 2020 Credit Agreement and, as of December 31, 2019, with respect to the 2016 Credit Agreement.
We are required to make annual principal payments on the 2020 Term Loan. On September 30, 2020, we made a voluntary prepayment of $22.5 million, which was applied against our scheduled payments on a ratable basis. Principal payments of $13.9 million are due on December 31 of each subsequent year. All unpaid principal and interest is due on March 2, 2025.
Share Repurchase Program and Dividends
In September 2011, our Board of Directors (the “Board”) authorized a share repurchase program allowing us to begin repurchasing shares of our outstanding common stock. Subsequently, the Board has from time to time increased the amount of our common stock that we may repurchase under such program. Since the inception of the repurchase program, the Board has authorized us to repurchase up to $1.15 billion of our outstanding common stock. During the year ended December 31, 2020, we repurchased approximately 1.7 million shares of our common stock for approximately $112.6 million. Since the inception of the repurchase program through December 31, 2020, we have repurchased approximately 17.5 million shares of our common stock for approximately $904.0 million. As of December 31, 2020, there remained authorization for us to repurchase approximately $246.0 million of our shares. The repurchase program has no expiration date, does not obligate the Company to acquire any particular amount of common stock, and may be suspended, recommenced, or discontinued at any time or from time to time without prior notice. We may repurchase our shares from time to time to the extent permitted by securities laws and other legal requirements, including provisions in our 2020 Credit Agreement placing limitations on such repurchases. The repurchase program has been and will be funded from our operations.
We have paid quarterly dividends since October 25, 2011. We paid a regular quarterly dividend of $0.08 per share throughout 2020. In December 2020, our Board of Directors announced its intention to increase the regular quarterly dividend to $0.13 per share commencing with the dividend to be paid in the first quarter of 2021. Our 2020 Credit Agreement places limitations on the payment of dividends on our common stock. However, we do not believe that the terms of such agreement currently materially limit our ability to pay a quarterly dividend of $0.13 per share for the foreseeable future. The payment of dividends has been and will be funded from our operations.
Off Balance Sheet Arrangements and Other Commitments
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. Surety Bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts. We have agreed to indemnify the Surety Companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. Public sector contracts require Surety Bonds more frequently than private sector contracts and, accordingly, our bonding requirements typically increase as the amount of our public sector work increases. As of December 31, 2020, based on the percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $1.3 billion, which represents approximately 29% of our total remaining performance obligations. In addition, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for certain of our employees, at the request of labor unions representing such employees, or as collateral for certain insurance obligations. As of December 31, 2020, we satisfied approximately $37.5 million of the collateral requirements of our insurance programs by utilizing Surety Bonds. We are not aware of any losses in connection with Surety Bonds that have been posted on our behalf, and we do not expect to incur significant losses in the foreseeable future.
From time to time, we discuss with our current and other Surety Bond providers the amounts 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 issued on our behalf and believe those amounts are currently adequate for our needs. However, if we experience changes in our bonding relationships or if there are adverse changes in the surety industry, we may (a) 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, parent company guarantees, or cash, in order to convince customers to forego the requirement for Surety Bonds, (b) increase our activities in our business segments that rarely require Surety Bonds, such as our building and industrial services segments, and/or (c) refrain from bidding for certain projects that require Surety Bonds. There can be no assurance that we would 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. 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 flows.
In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees.
We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein.
Contractual Obligations
The following is a summary of material contractual obligations and other commercial commitments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual Obligations
|
Total
|
|
Less
than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
After
5 years
|
Term Loan (including interest at 1.15%) (1)
|
$
|
282.6
|
|
|
$
|
17.0
|
|
|
$
|
33.6
|
|
|
$
|
232.0
|
|
|
$
|
—
|
|
Finance leases
|
10.4
|
|
|
4.2
|
|
|
4.6
|
|
|
1.5
|
|
|
0.1
|
|
Operating leases
|
291.2
|
|
|
61.8
|
|
|
93.7
|
|
|
58.8
|
|
|
76.9
|
|
Open purchase obligations (2)
|
1,304.6
|
|
|
1,117.1
|
|
|
186.7
|
|
|
0.8
|
|
|
—
|
|
Other long-term obligations, including current portion (3)
|
486.1
|
|
|
124.5
|
|
|
351.4
|
|
|
10.2
|
|
|
—
|
|
Total Contractual Obligations
|
$
|
2,374.9
|
|
|
$
|
1,324.6
|
|
|
$
|
670.0
|
|
|
$
|
303.3
|
|
|
$
|
77.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expirations by Period
|
Other Commercial Commitments
|
Total
Amounts
Committed
|
|
Less
than
1 year
|
|
1-3
years
|
|
3-5
years
|
|
After
5 years
|
Letters of credit
|
$
|
71.3
|
|
|
$
|
71.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
_________________
(1) As of December 31, 2020, the amount outstanding under the 2020 Term Loan was $270.6 million. There were no direct borrowings outstanding under the 2020 Revolving Credit Facility.
(2) Represents open purchase orders for material and subcontracting costs related to construction and services contracts. These purchase orders are not reflected in the Consolidated Balance Sheets and should not impact future cash flows as amounts should be recovered through customer billings.
(3) Primarily represents insurance related liabilities, and liabilities for deferred income taxes, incentive compensation and deferred compensation, classified as other long-term obligations in the Consolidated Balance Sheets. Cash payments for insurance and deferred compensation related liabilities may be payable beyond three years, however it is not practical to estimate these payments; therefore, these liabilities are reflected in the 1-3 years payment period. Amounts also include the employer portion of Social Security taxes, which have been deferred pursuant to the Coronavirus Aid, Relief, and Economic Security Act, and are payable in two equal installments in December of 2021 and December of 2022. Such deferred payroll taxes are classified as either accrued payroll and benefits or other long-term obligations in the Consolidated Balance Sheet as of December 31, 2020. We provide funding to our post retirement 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 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.
Legal Proceedings
We are involved in several legal proceedings in which damages and claims have been asserted against us. While litigation is subject to many uncertainties and the outcome of litigation is not predictable with assurance, we do not believe that any such matters will have a material adverse effect on our financial position, results of operations or liquidity.
Certain Insurance Matters
As of December 31, 2020 and 2019, we utilized approximately $71.2 million of letters of credit obtained under our 2020 Revolving Credit Facility and $108.9 million of letters of credit obtained under our 2016 Revolving Credit Facility, respectively, as collateral for insurance obligations. As of December 31, 2020, we satisfied an additional $37.5 million of these collateral requirements by utilizing Surety Bonds.
New Accounting Pronouncements
We review new accounting standards to determine the expected impact, if any, that the adoption of such standards will have on our financial position and/or results of operations. See Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations or liquidity.
Application of Critical Accounting Policies
Our consolidated financial statements are based on the application of significant accounting policies, which require management to make estimates and assumptions. Our significant accounting policies are described in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Form 10-K. We believe that some of the more subjective areas in the application of accounting policies that affect our financial condition and results of operations are the impact of changes in the estimates and judgments pertaining to: (a) revenue recognition from contracts with customers; (b) collectability or valuation of accounts receivable and the associated allowance for credit losses; (c) insurance liabilities; (d) income taxes; and (e) goodwill, identifiable intangible assets, and other long-lived assets.
Revenue Recognition from Contracts with Customers
We believe our most critical accounting policy is revenue recognition. The Company recognizes revenue by applying the following five step model: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue as performance obligations are satisfied.
The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. A good or service is considered to be transferred when the customer obtains control. The Company can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time. The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as we perform, (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) the Company’s performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date.
For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.
For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced. Our fixed price construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. For our unit price construction contracts, progress towards complete satisfaction is measured through an output method, such as the amount of units produced or delivered, when our performance does not produce significant amounts of work in process or finished goods prior to complete satisfaction of such performance obligations.
For our services contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly, and the customer receives and consumes the benefits of our performance throughout the contract term.
The timing of revenue recognition for the manufacturing of new build heat exchangers within our United States industrial services segment depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. For these performance obligations, we use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer. For bill-and-hold arrangements, revenue is recognized when the customer obtains control of the heat exchanger, which may be prior to shipping, if certain recognition criteria are met.
For certain of our revenue streams, such as call-out repair and service work, outage services, refinery turnarounds and specialty welding services that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date.
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident. During each of the years ended December 31, 2020 and 2019, there were no changes in total estimated costs that had a significant impact on our operating results. For the year ended December 31, 2018, we recognized losses of $10.0 million related to a change in total estimated costs on a transportation project within our United States electrical construction and facilities services segment, resulting in part from contract scope issues.
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our long-term construction projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the United States industrial services segment, are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded as revenue is recognized in advance of billings. Also included in contract assets are amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to scope and/or price, or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Consolidated Balance Sheets.
As of December 31, 2020 and 2019, contract assets included unbilled revenues for unapproved change orders of approximately $15.3 million and $33.1 million, respectively. As of December 31, 2020 and 2019, there were no claim amounts included within contract assets or accounts receivable. There were contractually billed amounts and retention related to contracts with unapproved change orders and claims of approximately $87.9 million and $89.0 million as of December 31, 2020 and 2019, respectively. For contracts in claim status, contractually billed amounts will generally not be paid by the customer to us until final resolution of the related claims.
Contract liabilities from our long-term construction contracts arise when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue. The long-term portion of contract liabilities is included in “Other long-term obligations” in the Consolidated Balance Sheets.
See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further disclosure regarding revenue recognition.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recognized in the period we deliver goods or provide services to our customers or when our right to consideration is unconditional. The Company maintains an allowance for credit losses. A considerable amount of judgment is required when determining expected credit losses. Estimates of such losses are recorded when we believe a customer, or group of customers, may not be able to meet their financial obligations due to deterioration in financial condition or credit rating. Relevant factors include our prior collection history with our customers, the related aging of past due balances, projections of credit losses based on historical trends in credit quality indicators or past events, and forecasts of future economic conditions. In addition to monitoring delinquent accounts, management reviews the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions, and evaluating material changes to a customer’s business, cash flows , and financial condition.
At December 31, 2020 and 2019, our accounts receivable of $1,922.1 million and $2,030.8 million, respectively, were recorded net of allowances for credit losses of $18.0 million and $14.5 million, respectively. Due to the economic disruption caused by the COVID-19 pandemic, our allowance for credit losses increased based on our evaluation of: (a) specific outstanding balances and (b) forecasts of future economic conditions and the expected impact on customer collections. Allowances for credit losses are based on the best facts available and are reassessed and adjusted on a regular basis as additional information is received. Should anticipated collections fail to materialize, or if future economic conditions compare unfavorably to our forecasts, we could experience an increase in our allowances for credit losses. The provision for our credit losses during 2020, 2019, and 2018 amounted to approximately $3.3 million, $2.6 million, and $2.1 million, respectively.
Insurance Liabilities
We have loss payment deductibles for certain workers’ compensation, automobile liability, general liability and property claims, have self-insured retentions for certain other casualty claims and are self-insured for employee-related healthcare claims. In addition, we maintain a wholly-owned captive insurance subsidiary to manage certain of our insurance liabilities. 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 independent third-party actuary to determine the best estimate for the majority of these obligations. We believe the liabilities recognized on the Consolidated 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 our 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. Our estimated net insurance liabilities for workers’ compensation, automobile liability, general liability and property claims increased by $2.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, partially as a result of greater potential exposures, including the impact of acquired companies. If our estimated insurance liabilities for workers’ compensation, automobile liability, general liability and property claims were to increase by 10%, it would have resulted in $17.2 million of additional expense for the year ended December 31, 2020.
Income Taxes
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and income tax bases of assets and liabilities as well as for net operating loss and tax credit carryforwards. Deferred income taxes are valued using enacted tax rates expected to be in effect when income taxes are paid or recovered, with the effect of a change in tax laws or rates recognized in the statement of operations in the period in which such change is enacted. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Deferred income taxes are recorded net of a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making such determination, we consider all available evidence, including projections of future taxable income, tax-planning strategies, and recent results of operations.
At December 31, 2020 and 2019, we had net deferred income tax liabilities of $29.4 million and $71.7 million, respectively, primarily resulting from differences between the carrying value and income tax bases of certain identifiable intangible assets, goodwill, and depreciable fixed assets. Included within these net deferred income tax liabilities are $217.1 million and $176.2 million of deferred income tax assets as of December 31, 2020 and 2019, respectively. The total valuation allowance on deferred income tax assets, primarily related to state net operating loss carryforwards, was approximately $3.9 million and $3.5 million as of December 31, 2020 and 2019, respectively. Based on our taxable income, which has generally exceeded the amount of our net deferred tax asset balance, as well as current projections of future taxable income, we have determined that it is more likely than not that our net deferred income tax assets will be realized. However, revisions to our forecasts or declining macroeconomic conditions could result in changes to our assessment of the realization of these deferred tax assets.
Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets
Goodwill
As of December 31, 2020 and 2019, we had goodwill of $851.8 million and $1,063.9 million, respectively, arising out of the acquisition of businesses. Goodwill is not amortized but instead allocated to its respective reporting unit and evaluated for impairment annually, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. We have determined that our reporting units are consistent with the reportable segments identified in Note 19 - Segment Information included in Item 8. Financial Statements and Supplementary Data. As of December 31, 2020, approximately 16.7% of our goodwill related to our United States electrical construction and facilities services segment, approximately 35.2% related to our United States mechanical construction and facilities services segment, approximately 35.5% related to our United States building services segment, and approximately 12.6% related to our United States industrial services segment.
Absent any earlier identified impairment indicators, we perform our annual goodwill impairment assessment on October 1 each fiscal year. Qualitative indicators that may trigger the need for interim quantitative impairment testing include, among others, a deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, an interim impairment test may be triggered by a significant change in business climate, a loss of a significant customer, increased competition, or a sustained decrease in share price. In assessing whether our goodwill is impaired, we compare the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment is recognized. However, if the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired and an impairment loss in the amount of the excess is recognized and charged to operations.
Our operations were significantly impacted by the COVID-19 pandemic starting with the second quarter of 2020. During the same period, the demand for oil significantly deteriorated as a result of the pandemic and the corresponding preventative measures taken around the world to mitigate the spread of the virus, including various local, state, and national jurisdictional “shelter-in-place” orders. Further, other macroeconomic events, including the escalation of geopolitical tensions between the Organization of Petroleum Exporting Countries (OPEC) and Russia, resulted in a significant drop in the price of crude oil. These negative factors created significant volatility and uncertainty in the markets in which our United States industrial services segment operates, resulting in a significant decrease in the demand for our service offerings. Consequently, in the second quarter of 2020, we revised our near-term revenue and operating margin expectations for our United States industrial services segment and concluded that a triggering event had occurred which indicated it was more likely than not that the fair value of our United States industrial services segment was less than its carrying amount.
Accordingly, we performed a quantitative goodwill impairment test and determined the fair value of our United States industrial services segment using an income approach whereby fair value was calculated utilizing discounted estimated future cash flows, assuming a risk-adjusted industry weighted average cost of capital of 12.0%. Such weighted average cost of capital was developed with the assistance of an independent third-party valuation specialist and reflected the overall level of inherent risk within the business and the rate of return a market participant would expect to earn as of the interim date. Cash flow projections were derived from internal forecasts of anticipated revenue growth rates and operating margins, updated for the events discussed above, with cash flows beyond the discrete forecast period estimated using a terminal value calculation which incorporated historical and forecasted trends, an estimate of long-term growth rates, and assumptions about the future demand for our services. The perpetual growth rate utilized in the interim terminal value calculation was 2.0%.
Based on the outcome of our interim goodwill impairment test, we concluded that the carrying amount of our United States industrial services segment exceeded its fair value, resulting in the recognition of a non-cash goodwill impairment charge of $225.5 million, which is included within our results of operations for the year ended December 31, 2020. We did not identify impairment indicators related to any other reporting unit that would have required an interim impairment assessment.
As of October 1, 2020, we performed our annual impairment assessment of all reporting units and determined there was no incremental impairment of goodwill. Based on these latest impairment assessments, the fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment exceeded their carrying values by approximately $946.5 million, $1,682.2 million, $715.8 million, and $18.9 million, respectively.
Consistent with the methodology applied in our interim impairment test, we determined the fair value of each of our reporting units using an income approach whereby fair value was calculated utilizing discounted estimated future cash flows, assuming a risk-adjusted industry weighted average cost of capital. The weighted average cost of capital used in our annual impairment testing was 10.6%, 10.4%, and 11.6% for our United States construction segments, our United States building services segment, and our United States industrial services segment, respectively. These weighted average cost of capital estimates were developed with the assistance of an independent third-party valuation specialist and reflect the overall level of inherent risk within the respective reporting unit and the rate of return a market participant would expect to earn.
Our cash flow projections were derived from our most recent internal forecasts of anticipated revenue growth rates and operating margins, with cash flows beyond the discrete forecast period estimated using a terminal value calculation which incorporated historical and forecasted trends, an estimate of long-term growth rates, and assumptions about the future demand for our services. The perpetual growth rate used for our annual testing was 2.0% for all of our reporting units.
Due to the inherent uncertainties involved in making estimates, our assumptions may change in future periods. Estimates and assumptions made for purposes of our goodwill impairment testing may prove to be inaccurate predictions of the future, and other factors used in assessing fair value, such as the weighted average cost of capital, are outside the control of management. Unfavorable changes in certain of these key assumptions may affect future testing results. For example, keeping all other assumptions constant, a 50 basis point increase in the weighted average cost of capital would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment to decrease by approximately $63.3 million, $115.9 million, $69.9 million, and $23.2 million, respectively. In addition, keeping all other assumptions constant, a 50 basis point reduction in the perpetual growth rate would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment to decrease by approximately $31.0 million, $58.9 million, $33.5 million, and $9.7 million, respectively. Given the amounts by which the fair value exceeds the carrying value for each of our reporting units other than our United States industrial services segment, the decreases in estimated fair values described above would not have significantly impacted the results of our impairment tests. In the case of our United States industrial services segment, however, such decreases would cause the estimated fair value of such reporting unit to approximate its carrying value.
For the years ended December 31, 2019 and 2018, no impairment of our goodwill was recognized.
Identifiable Intangible Assets and Other Long-Lived Assets
As of December 31, 2020 and 2019, net identifiable intangible assets (primarily consisting of our contract backlog, developed technology/vendor network, customer relationships, and subsidiary trade names) arising out of the acquisition of businesses were $582.9 million and $611.4 million, respectively. 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 anticipated macroeconomic conditions as well as our ability to successfully integrate acquired businesses.
Absent earlier indicators of impairment, we test for impairment of subsidiary trade names that are not subject to amortization on an annual basis (October 1). In performing this test, we calculate the fair value of each trade name using the “relief from royalty payments” methodology. This approach involves two steps: (a) estimating reasonable royalty rates for each trade name and (b) applying these royalty rates to a net revenue stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each trade name. If the carrying amount of the trade name is greater than the implied fair value of the trade name, an impairment in the amount of the excess is recognized and charged to operations. In addition, we review for impairment of identifiable intangible assets that are being amortized as well as other long-lived assets whenever facts and circumstances indicate that their carrying values may not be fully recoverable. This test compares their carrying values to the undiscounted pre-tax cash flows expected to result from the use of the assets. If the assets are impaired, the assets are written down to their fair values, generally determined based on their discounted estimated future cash flows.
Given the negative market conditions disclosed above, we also evaluated certain of our identifiable intangible assets and other long-lived assets for impairment during the second quarter of 2020. Such assets included those associated with the businesses in our United States industrial services segment and certain businesses within our United States electrical construction and facilities services segment whose results are also highly dependent on the strength of the oil and gas industry. As a result of these assessments, we recorded non-cash impairment charges of $7.3 million, which have been included within our results of operations for the year ended December 31, 2020. Of this amount, $4.8 million related to our United States industrial services segment and was comprised of: (a) a $4.2 million subsidiary trade name impairment and (b) a $0.6 million impairment on certain other long-lived assets. The remaining $2.5 million represented a subsidiary trade name impairment within our United States electrical construction and facilities services segment.
As of October 1, 2020, we performed our annual impairment testing of all subsidiary trade names that are not subject to amortization and determined that there was no incremental impairment of these assets. For the years ended December 31, 2019 and 2018, no impairment of our indefinite-lived trade names was recognized.
With respect to identifiable intangible assets that are being amortized as well as other long-lived assets, we did not identify any further circumstances indicating that their carrying values may not be fully recoverable and, therefore, no additional impairment testing was required for these assets during the year ended December 31, 2020. For the year ended December 31, 2019, no impairment of our finite-lived intangible assets or other long-lived assets was recognized. We recorded a $0.9 million non-cash impairment charge associated with a finite-lived trade name within our United States industrial services segment during the year ended December 31, 2018.
Other Considerations
As referenced above, impairment testing is based upon assumptions and estimates determined by management from a review of our operating results and business plans as well as forecasts of anticipated growth rates and margins, among other considerations. In addition, estimates of weighted average costs of capital are developed with the assistance of an independent third-party valuation specialist. These assumptions and estimates may change in future periods, especially in consideration of the uncertainty created by the COVID-19 pandemic and its continued impact on the broader economy and our results of operations. Significant adverse changes to external market conditions or our internal forecasts, if any, could result in future impairment charges. It is not possible at this time to determine if any future impairment charge will result or, if it does, whether such a charge would be material to our results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
December 31,
2019
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
902,867
|
|
|
$
|
358,818
|
|
Accounts receivable, less allowance for credit losses of $18,031 and $14,466, respectively
|
1,922,096
|
|
|
2,030,813
|
|
Contract assets
|
171,956
|
|
|
177,830
|
|
Inventories
|
53,338
|
|
|
40,446
|
|
Prepaid expenses and other
|
70,679
|
|
|
51,976
|
|
Total current assets
|
3,120,936
|
|
|
2,659,883
|
|
Property, plant and equipment, net
|
158,427
|
|
|
156,187
|
|
Operating lease right-of-use assets
|
242,155
|
|
|
245,471
|
|
Goodwill
|
851,783
|
|
|
1,063,911
|
|
Identifiable intangible assets, net
|
582,893
|
|
|
611,444
|
|
Other assets
|
107,646
|
|
|
93,462
|
|
Total assets
|
$
|
5,063,840
|
|
|
$
|
4,830,358
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current maturities of long-term debt and finance lease liabilities
|
$
|
16,910
|
|
|
$
|
18,092
|
|
Accounts payable
|
671,886
|
|
|
665,402
|
|
Contract liabilities
|
722,252
|
|
|
623,642
|
|
Accrued payroll and benefits
|
450,955
|
|
|
382,573
|
|
Other accrued expenses and liabilities
|
247,597
|
|
|
195,757
|
|
Operating lease liabilities, current
|
53,632
|
|
|
53,144
|
|
Total current liabilities
|
2,163,232
|
|
|
1,938,610
|
|
Borrowings under revolving credit facility
|
—
|
|
|
50,000
|
|
Long-term debt and finance lease liabilities
|
259,619
|
|
|
244,139
|
|
Operating lease liabilities, long-term
|
205,362
|
|
|
204,950
|
|
Other long-term obligations
|
382,383
|
|
|
334,879
|
|
Total liabilities
|
3,010,596
|
|
|
2,772,578
|
|
Equity:
|
|
|
|
EMCOR Group, Inc. stockholders’ equity:
|
|
|
|
Preferred stock, $0.10 par value, 1,000,000 shares authorized, zero issued and outstanding
|
—
|
|
|
—
|
|
Common stock, $0.01 par value, 200,000,000 shares authorized, 60,571,140 and 60,359,252 shares issued, respectively
|
606
|
|
|
604
|
|
Capital surplus
|
47,464
|
|
|
32,274
|
|
Accumulated other comprehensive loss
|
(109,233)
|
|
|
(89,288)
|
|
Retained earnings
|
2,480,321
|
|
|
2,367,481
|
|
Treasury stock, at cost 5,815,240 and 4,139,421 shares, respectively
|
(366,490)
|
|
|
(253,937)
|
|
Total EMCOR Group, Inc. stockholders’ equity
|
2,052,668
|
|
|
2,057,134
|
|
Noncontrolling interests
|
576
|
|
|
646
|
|
Total equity
|
2,053,244
|
|
|
2,057,780
|
|
Total liabilities and equity
|
$
|
5,063,840
|
|
|
$
|
4,830,358
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Revenues
|
$
|
8,797,061
|
|
|
$
|
9,174,611
|
|
|
$
|
8,130,631
|
|
Cost of sales
|
7,401,679
|
|
|
7,818,743
|
|
|
6,925,178
|
|
Gross profit
|
1,395,382
|
|
|
1,355,868
|
|
|
1,205,453
|
|
Selling, general and administrative expenses
|
903,584
|
|
|
893,453
|
|
|
799,157
|
|
Restructuring expenses
|
2,214
|
|
|
1,523
|
|
|
2,306
|
|
Impairment loss on goodwill, identifiable intangible assets, and
other long-lived assets
|
232,750
|
|
|
—
|
|
|
907
|
|
Operating income
|
256,834
|
|
|
460,892
|
|
|
403,083
|
|
Net periodic pension (cost) income
|
2,980
|
|
|
1,553
|
|
|
2,743
|
|
Interest expense
|
(9,009)
|
|
|
(13,821)
|
|
|
(13,544)
|
|
Interest income
|
1,521
|
|
|
2,265
|
|
|
2,746
|
|
Income from continuing operations before income taxes
|
252,326
|
|
|
450,889
|
|
|
395,028
|
|
Income tax provision
|
119,383
|
|
|
125,749
|
|
|
109,106
|
|
Income from continuing operations
|
132,943
|
|
|
325,140
|
|
|
285,922
|
|
Loss from discontinued operation, net of income taxes
|
—
|
|
|
—
|
|
|
(2,345)
|
|
Net income including noncontrolling interests
|
132,943
|
|
|
325,140
|
|
|
283,577
|
|
Less: Net income attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
(46)
|
|
Net income attributable to EMCOR Group, Inc.
|
$
|
132,943
|
|
|
$
|
325,140
|
|
|
$
|
283,531
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
From continuing operations attributable to EMCOR Group, Inc. common stockholders
|
$
|
2.41
|
|
|
$
|
5.78
|
|
|
$
|
4.92
|
|
From discontinued operation
|
—
|
|
|
—
|
|
|
(0.04)
|
|
Net income attributable to EMCOR Group, Inc. common stockholders
|
$
|
2.41
|
|
|
$
|
5.78
|
|
|
$
|
4.88
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
From continuing operations attributable to EMCOR Group, Inc. common stockholders
|
$
|
2.40
|
|
|
$
|
5.75
|
|
|
$
|
4.89
|
|
From discontinued operation
|
—
|
|
|
—
|
|
|
(0.04)
|
|
Net income attributable to EMCOR Group, Inc. common stockholders
|
$
|
2.40
|
|
|
$
|
5.75
|
|
|
$
|
4.85
|
|
Dividends declared per common share
|
$
|
0.32
|
|
|
$
|
0.32
|
|
|
$
|
0.32
|
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For The Years Ended December 31,
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Net income including noncontrolling interests
|
$
|
132,943
|
|
|
$
|
325,140
|
|
|
$
|
283,577
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
Foreign currency translation adjustments
|
2,088
|
|
|
1,689
|
|
|
(1,322)
|
|
Changes in post retirement plans (1)
|
(22,033)
|
|
|
(3,315)
|
|
|
7,860
|
|
Other comprehensive (loss) income
|
(19,945)
|
|
|
(1,626)
|
|
|
6,538
|
|
Comprehensive income
|
112,998
|
|
|
323,514
|
|
|
290,115
|
|
Less: Comprehensive income attributable to noncontrolling interests
|
—
|
|
|
—
|
|
|
(46)
|
|
Comprehensive income attributable to EMCOR Group, Inc.
|
$
|
112,998
|
|
|
$
|
323,514
|
|
|
$
|
290,069
|
|
_________________
(1) Net of tax benefit (provision) of $5.1 million, $0.7 million, and $(2.1) million for the years ended December 31, 2020, 2019, and 2018, respectively.
The accompanying notes to consolidated financial statements are an integral part of these statements.
EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cash flows - operating activities:
|
|
|
|
|
|
Net income including noncontrolling interests
|
$
|
132,943
|
|
|
$
|
325,140
|
|
|
$
|
283,577
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
46,721
|
|
|
43,945
|
|
|
38,472
|
|
Amortization of identifiable intangible assets
|
59,950
|
|
|
48,142
|
|
|
42,443
|
|
Provision for credit losses
|
3,269
|
|
|
2,628
|
|
|
2,123
|
|
Deferred income taxes
|
(36,354)
|
|
|
1,701
|
|
|
4,249
|
|
Gain on sale or disposal of property, plant and equipment
|
(122)
|
|
|
(3,981)
|
|
|
(517)
|
|
Excess tax benefits from share-based compensation
|
(191)
|
|
|
(984)
|
|
|
(1,646)
|
|
Equity (income) loss from unconsolidated entities
|
(14)
|
|
|
2,990
|
|
|
(347)
|
|
Non-cash expense for amortization of debt issuance costs
|
998
|
|
|
1,186
|
|
|
1,186
|
|
Non-cash expense from contingent consideration arrangements
|
649
|
|
|
1,373
|
|
|
186
|
|
Non-cash expense for impairment of goodwill, identifiable intangible assets, and other long- lived assets
|
232,750
|
|
|
—
|
|
|
907
|
|
Non-cash share-based compensation expense
|
11,151
|
|
|
11,386
|
|
|
11,030
|
|
Non-cash income from changes in unrecognized tax benefits
|
—
|
|
|
—
|
|
|
(72)
|
|
Distributions from unconsolidated entities
|
—
|
|
|
1,074
|
|
|
3,110
|
|
Changes in operating assets and liabilities, excluding the effect of businesses acquired:
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
139,377
|
|
|
(135,954)
|
|
|
(146,101)
|
|
(Increase) decrease in inventories
|
(12,709)
|
|
|
4,345
|
|
|
(3,915)
|
|
Decrease (increase) in contract assets
|
7,829
|
|
|
(10,111)
|
|
|
(30,935)
|
|
(Decrease) increase in accounts payable
|
(9,022)
|
|
|
(33,971)
|
|
|
78,554
|
|
Increase in contract liabilities
|
85,142
|
|
|
51,310
|
|
|
20,726
|
|
Increase (decrease) in accrued payroll and benefits and other accrued expenses and liabilities
|
113,835
|
|
|
49,551
|
|
|
(24,715)
|
|
Changes in other assets and liabilities, net
|
30,164
|
|
|
(4,070)
|
|
|
(7,304)
|
|
Net cash provided by operating activities
|
806,366
|
|
|
355,700
|
|
|
271,011
|
|
Cash flows - investing activities:
|
|
|
|
|
|
Payments for acquisitions of businesses, net of cash acquired
|
(50,357)
|
|
|
(300,980)
|
|
|
(72,080)
|
|
Proceeds from sale or disposal of property, plant and equipment
|
3,463
|
|
|
5,487
|
|
|
1,237
|
|
Purchases of property, plant and equipment
|
(47,969)
|
|
|
(48,432)
|
|
|
(43,479)
|
|
Investments in and advances to unconsolidated entities
|
—
|
|
|
(2,252)
|
|
|
(3,484)
|
|
Distributions from unconsolidated entities
|
—
|
|
|
838
|
|
|
84
|
|
Net cash used in investing activities
|
(94,863)
|
|
|
(345,339)
|
|
|
(117,722)
|
|
Cash flows - financing activities:
|
|
|
|
|
|
Proceeds from revolving credit facility
|
200,000
|
|
|
50,000
|
|
|
—
|
|
Repayments of revolving credit facility
|
(250,000)
|
|
|
(25,000)
|
|
|
—
|
|
Proceeds from long-term debt
|
300,000
|
|
|
—
|
|
|
—
|
|
Repayments of long-term debt and debt issuance costs
|
(286,987)
|
|
|
(15,198)
|
|
|
(15,235)
|
|
Repayments of finance lease liabilities
|
(4,470)
|
|
|
(4,571)
|
|
|
(1,501)
|
|
Dividends paid to stockholders
|
(17,674)
|
|
|
(17,950)
|
|
|
(18,640)
|
|
Repurchases of common stock
|
(112,553)
|
|
|
—
|
|
|
(216,244)
|
|
Taxes paid related to net share settlements of equity awards
|
(2,640)
|
|
|
(6,451)
|
|
|
(3,848)
|
|
Issuances of common stock under employee stock purchase plan
|
6,557
|
|
|
6,090
|
|
|
5,765
|
|
Payments for contingent consideration arrangements
|
(4,070)
|
|
|
(5,917)
|
|
|
(3,339)
|
|
Distributions to noncontrolling interests
|
(70)
|
|
|
(250)
|
|
|
—
|
|
Net cash used in financing activities
|
(171,907)
|
|
|
(19,247)
|
|
|
(253,042)
|
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
4,046
|
|
|
2,592
|
|
|
(3,421)
|
|
Increase (decrease) in cash, cash equivalents, and restricted cash
|
543,642
|
|
|
(6,294)
|
|
|
(103,174)
|
|
Cash, cash equivalents, and restricted cash at beginning of year (1)
|
359,920
|
|
|
366,214
|
|
|
469,388
|
|
Cash, cash equivalents, and restricted cash at end of period (1)
|
$
|
903,562
|
|
|
$
|
359,920
|
|
|
$
|
366,214
|
|
_________________
(1)Includes $0.7 million, $1.1 million, $2.3 million, and $2.0 million of restricted cash classified as “Prepaid expenses and other” in the Consolidated Balance Sheets as of December 31, 2020, 2019, 2018, and 2017, respectively.
The accompanying notes to consolidated financial statements are an integral part of these statements.
EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
For The Years Ended December 31,
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMCOR Group, Inc. Stockholders
|
|
|
|
Total
|
|
Common
stock
|
|
Capital
surplus
|
|
Accumulated other comprehensive loss (1)
|
|
Retained
earnings
|
|
Treasury
stock
|
|
Noncontrolling
interests
|
Balance, December 31, 2017
|
$
|
1,674,117
|
|
|
$
|
599
|
|
|
$
|
8,005
|
|
|
$
|
(94,200)
|
|
|
$
|
1,796,556
|
|
|
$
|
(37,693)
|
|
|
$
|
850
|
|
Net income including noncontrolling interests
|
283,577
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
283,531
|
|
|
—
|
|
|
46
|
|
Other comprehensive income
|
6,538
|
|
|
—
|
|
|
—
|
|
|
6,538
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cumulative-effect adjustment (2)
|
(854)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(854)
|
|
|
—
|
|
|
—
|
|
Common stock issued under share-based compensation plans
|
—
|
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax withholding for common stock issued under share-based compensation plans
|
(3,848)
|
|
|
—
|
|
|
(3,848)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued under employee stock purchase plan
|
5,765
|
|
|
1
|
|
|
5,764
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock dividends
|
(18,640)
|
|
|
—
|
|
|
153
|
|
|
—
|
|
|
(18,793)
|
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(216,244)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(216,244)
|
|
|
—
|
|
Share-based compensation expense
|
11,030
|
|
|
—
|
|
|
11,030
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, December 31, 2018
|
$
|
1,741,441
|
|
|
$
|
601
|
|
|
$
|
21,103
|
|
|
$
|
(87,662)
|
|
|
$
|
2,060,440
|
|
|
$
|
(253,937)
|
|
|
$
|
896
|
|
Net income including noncontrolling interests
|
325,140
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
325,140
|
|
|
—
|
|
|
—
|
|
Other comprehensive loss
|
(1,626)
|
|
|
—
|
|
|
—
|
|
|
(1,626)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued under share-based compensation plans
|
—
|
|
|
3
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax withholding for common stock issued under share-based compensation plans
|
(6,451)
|
|
|
—
|
|
|
(6,451)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued under employee stock purchase plan
|
6,090
|
|
|
—
|
|
|
6,090
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock dividends
|
(17,950)
|
|
|
—
|
|
|
149
|
|
|
—
|
|
|
(18,099)
|
|
|
—
|
|
|
—
|
|
Distributions to noncontrolling interests
|
(250)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(250)
|
|
Share-based compensation expense
|
11,386
|
|
|
—
|
|
|
11,386
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, December 31, 2019
|
$
|
2,057,780
|
|
|
$
|
604
|
|
|
$
|
32,274
|
|
|
$
|
(89,288)
|
|
|
$
|
2,367,481
|
|
|
$
|
(253,937)
|
|
|
$
|
646
|
|
Net income including noncontrolling interests
|
132,943
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
132,943
|
|
|
—
|
|
|
—
|
|
Other comprehensive loss
|
(19,945)
|
|
|
—
|
|
|
—
|
|
|
(19,945)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cumulative-effect adjustment (3)
|
(2,307)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,307)
|
|
|
—
|
|
|
—
|
|
Common stock issued under share-based compensation plans
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax withholding for common stock issued under share-based compensation plans
|
(2,640)
|
|
|
—
|
|
|
(2,640)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock issued under employee stock purchase plan
|
6,557
|
|
|
—
|
|
|
6,557
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock dividends
|
(17,674)
|
|
|
—
|
|
|
122
|
|
|
—
|
|
|
(17,796)
|
|
|
—
|
|
|
—
|
|
Repurchases of common stock
|
(112,553)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(112,553)
|
|
|
—
|
|
Distributions to noncontrolling interests
|
(70)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(70)
|
|
Share-based compensation expense
|
11,151
|
|
|
—
|
|
|
11,151
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, December 31, 2020
|
$
|
2,053,244
|
|
|
$
|
606
|
|
|
$
|
47,464
|
|
|
$
|
(109,233)
|
|
|
$
|
2,480,321
|
|
|
$
|
(366,490)
|
|
|
$
|
576
|
|
_________________
(1)Represents cumulative foreign currency translation and post retirement liability adjustments of $2.9 million and $(112.1) million, respectively, as of December 31, 2020, $0.8 million and $(90.1) million, respectively, as of December 31, 2019, and $(0.9) million and $(86.8) million, respectively, as of December 31, 2018.
(2)Represents adjustment to retained earnings upon the adoption of Accounting Standards Codification Topic 606.
(3)Represents adjustment to retained earnings upon the adoption of Accounting Standards Codification Topic 326.
The accompanying notes to consolidated financial statements are an integral part of these statements.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
References to the “Company,” “EMCOR,” “we,” “us,” “our” and similar words refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise.
We are one of the largest electrical and mechanical construction and facilities services firms in the United States. In addition, we provide a number of building services and industrial services. We specialize principally in providing construction services relating to electrical and mechanical systems in all types of facilities and in providing various services relating to the operation, maintenance and management of facilities, including refineries and petrochemical plants.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and joint ventures. Significant intercompany accounts and transactions have been eliminated. All investments over which we exercise significant influence, but do not control (a 20% to 50% ownership interest), are accounted for using the equity method of accounting. For joint ventures that have been accounted for using the consolidation method of accounting, noncontrolling interests represent the allocation of earnings to our joint venture partners who either have a minority-ownership interest in the joint venture or are not at risk for the majority of losses of the joint venture.
The results of operations of companies acquired have been included in the results of operations from the date of the respective acquisition.
Principles of Preparation
The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented as discontinued operations.
Revenue Recognition
Revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Refer to Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements for additional information.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, we consider all highly liquid instruments with original maturities of three months or less to be cash equivalents. We maintain a centralized cash management system whereby our excess cash balances are invested in high quality, short-term money market instruments, which are considered cash equivalents. We have cash balances in certain of our domestic bank accounts that exceed federally insured limits.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recognized in the period we deliver goods or provide services to our customers or when our right to consideration is unconditional. The Company maintains an allowance for credit losses. A considerable amount of judgment is required when determining expected credit losses. Estimates of such losses are recorded when we believe a customer, or group of customers, may not be able to meet their financial obligations due to deterioration in financial condition or credit rating. Relevant factors include our prior collection history with our customers, the related aging of past due balances, projections of credit losses based on historical trends in credit quality indicators or past events, and forecasts of future economic conditions. In addition to monitoring delinquent accounts, management reviews the credit quality of its receivables by, among other things, obtaining credit ratings of significant customers, assessing economic and market conditions, and evaluating material changes to a customer’s business, cash flows, and financial condition.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
At December 31, 2020 and 2019, our accounts receivable of $1,922.1 million and $2,030.8 million, respectively, were recorded net of allowances for credit losses of $18.0 million and $14.5 million, respectively. Due to the economic disruption caused by the COVID-19 pandemic, our allowance for credit losses increased based on our evaluation of: (a) specific outstanding balances and (b) forecasts of future economic conditions and the expected impact on customer collections. Allowances for credit losses are based on the best facts available and are reassessed and adjusted on a regular basis as additional information is received. Should anticipated collections fail to materialize, or if future economic conditions compare unfavorably to our forecasts, we could experience an increase in our credit losses. The provision for credit losses during 2020, 2019, and 2018 amounted to approximately $3.3 million, $2.6 million, and $2.1 million, respectively.
The change in the allowance for credit losses for the year ended December 31, 2020 was as follows (in thousands):
|
|
|
|
|
|
Balance at December 31, 2019
|
$
|
14,466
|
|
Cumulative-effect adjustment
|
3,150
|
|
Provision for credit losses
|
3,269
|
|
Amounts written off against the allowance, net of recoveries
|
(2,854)
|
|
Balance at December 31, 2020
|
$
|
18,031
|
|
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined principally using the average cost method.
Leases
At the inception of a contract, we determine whether the arrangement is or contains a lease. Leases are classified as either operating or finance, based on our evaluation of certain criteria. With the exception of short-term leases (leases with an initial term of 12 months or less), we record right-of-use assets and corresponding lease liabilities on the balance sheet for all leases with contractual fixed payments. Lease liabilities are measured at the present value of remaining lease payments, while right-of-use assets are initially set equal to the lease liability, as adjusted for any payments made prior to lease commencement, lease incentives, and any initial direct costs incurred by us. For operating leases, rent expense is recognized on a straight-line basis over the term of the lease, and right-of-use assets are subsequently re-measured to reflect the effect of uneven lease payments. For finance leases, right-of-use assets are amortized on a straight-line basis over the lease term. Expenses for finance leases include the amortization of right-of-use assets, which is recorded as depreciation and amortization expense, and interest expense, which reflects interest accrued on the lease liability. Refer to Note 17 - Leases of the notes to consolidated financial statements for additional information.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation, including amortization of assets under finance leases, is recorded principally using the straight-line method over estimated useful lives of 3 to 10 years for machinery and equipment, 3 to 7 years for vehicles, furniture and fixtures and computer hardware/software, and 25 years for buildings. Leasehold improvements are amortized over the shorter of the remaining lease term or the expected useful life of the improvement.
The carrying values of property, plant and equipment are reviewed for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. In performing this review for recoverability, property, plant and equipment is assessed for possible impairment by comparing their carrying values to their undiscounted net pre-tax cash flows expected to result from the use of the asset. Impaired assets are written down to their fair values, generally determined based on their estimated future discounted cash flows.
Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets
Goodwill and other identifiable intangible assets with indefinite lives, such as trade names, are tested at least annually for impairment (which we test each October 1, absent any earlier identified impairment indicators) and are written down if impaired. Identifiable intangible assets with finite lives are amortized over their useful lives and are reviewed for impairment whenever facts and circumstances indicate that their carrying values may not be fully recoverable. See Note 9 - Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets of the notes to consolidated financial statements for additional information.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Insurance Liabilities
Insurance liabilities for automobile liability, workers’ compensation and general liability claims are determined based on claims filed and an estimate of claims incurred but not yet reported. The liabilities are derived from known facts, historical trends, and industry averages, utilizing the assistance of an independent third-party actuary to determine the best estimate for such obligations. At December 31, 2020 and 2019, the estimated current portion of such undiscounted insurance liabilities of $48.2 million and $48.3 million, respectively, were included in “Other accrued expenses and liabilities” in the accompanying Consolidated Balance Sheets. The estimated non-current portion of such undiscounted insurance liabilities included in “Other long-term obligations” at December 31, 2020 and 2019 were $192.8 million and $186.0 million, respectively. The current portion of anticipated insurance recoveries of $14.4 million and $13.8 million at December 31, 2020 and 2019, respectively, were included in “Prepaid expenses and other” and the non-current portion of anticipated insurance recoveries of $54.3 million and $50.9 million at December 31, 2020 and 2019, respectively, were included in “Other assets” in the accompanying Consolidated Balance Sheets.
Foreign Operations
The financial statements and transactions of our foreign subsidiaries are maintained in their functional currency and translated into U.S. dollars when preparing our consolidated financial statements. Statements of operations, comprehensive income, and cash flows are translated using weighted average monthly exchange rates, while balance sheets are translated at month-end exchange rates. Translation adjustments are recorded as “Accumulated other comprehensive loss,” a separate component of “Equity.”
Income Taxes
The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the expected future taxable consequences of temporary differences between the financial statement and income tax bases of assets and liabilities as well as for net operating loss and tax credit carryforwards. Deferred income taxes are valued using enacted tax rates expected to be in effect when income taxes are paid or recovered, with the effect of a change in tax laws or rates recognized in the statement of operations in the period in which such change is enacted. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Deferred income taxes are recorded net of a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making such determination, we consider all available evidence, including projections of future taxable income, tax-planning strategies, and recent results of operations.
Tax benefits associated with uncertain tax positions are recognized only if it is more likely than not that the tax position would be sustained on its technical merits. For positions not meeting the “more likely than not” test, no tax benefit is recognized. To the extent interest and penalties may be assessed related to unrecognized tax benefits, we record accruals for such amounts as a component of the income tax provision. We had no unrecognized income tax benefits as of December 31, 2020 and 2019.
Valuation of Share-Based Compensation Plans
We have various types of share-based compensation plans and programs, which are administered by our Board of Directors or its Compensation and Personnel Committee. See Note 14 - Share-Based Compensation Plans of the notes to consolidated financial statements for additional information regarding the share-based compensation plans and programs.
We recognize all share-based payments issued to acquire goods or services in the statement of operations based on the fair value of such payments. Compensation expense related to share-based awards is recognized over the requisite service period, which is generally the vesting period. For shares subject to graded vesting, our policy is to apply the straight-line method in recognizing compensation expense. The benefits of tax deductions in excess of recognized compensation expense are recognized in the Consolidated Statements of Operations when the underlying awards vest or are settled.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
New Accounting Pronouncements
On January 1, 2020, we adopted the accounting pronouncement issued by the Financial Accounting Standards Board (“FASB”), which changes the way in which entities estimate and present credit losses for most financial assets, including accounts receivable and contract assets. This pronouncement replaces the previous incurred loss model with an expected credit loss model that requires consideration of a broader range of information when estimating expected credit losses over the contractual life of an asset. This guidance requires entities to estimate expected credit losses by considering forecasts of future economic conditions in addition to information about past events and current conditions. The cumulative effect of applying the new guidance was recorded as a reduction to retained earnings in the amount of $2.3 million, net of deferred taxes of $0.9 million. Our financial position and results of operations for reporting periods beginning on or after January 1, 2020 reflect the guidance issued under this new accounting pronouncement, while prior periods continue to be reported in accordance with previous guidance and historical accounting policy.
In December 2019, an accounting pronouncement was issued by the FASB which simplifies the accounting for income taxes by eliminating certain exceptions to existing guidance surrounding intraperiod tax allocations and the methodology for calculating income taxes in an interim period. The guidance also simplifies aspects of the accounting for franchise taxes as well as enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The pronouncement is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. Certain aspects of this standard must be applied retrospectively while other aspects are to be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company intends to adopt this accounting pronouncement on January 1, 2021, and does not anticipate that such adoption will have a material impact on our financial position and/or results of operations.
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services by applying the following five step model:
(1) Identify the contract with a customer
A contract with a customer exists when: (a) the parties have approved the contract and are committed to perform their respective obligations, (b) the rights of the parties can be identified, (c) payment terms can be identified, (d) the arrangement has commercial substance, and (e) collectability of consideration is probable. Judgment is required when determining if the contractual criteria are met, specifically in the earlier stages of a project when a formally executed contract may not yet exist. In these situations, the Company evaluates all relevant facts and circumstances, including the existence of other forms of documentation or historical experience with our customers that may indicate a contractual agreement is in place and revenue should be recognized. In determining if the collectability of consideration is probable, the Company considers the customer’s ability and intention to pay such consideration through an evaluation of several factors, including an assessment of the creditworthiness of the customer and our prior collection history with such customer.
(2) Identify the performance obligations in the contract
At contract inception, the Company assesses the goods or services promised in a contract and identifies, as a separate performance obligation, each distinct promise to transfer goods or services to the customer. The identified performance obligations represent the “unit of account” for purposes of determining revenue recognition. In order to properly identify separate performance obligations, the Company applies judgment in determining whether each good or service provided is: (a) capable of being distinct, whereby the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and (b) distinct within the context of the contract, whereby the transfer of the good or service to the customer is separately identifiable from other promises in the contract.
In addition, when assessing performance obligations within a contract, the Company considers the warranty provisions included within such contract. To the extent the warranty terms provide the customer with an additional service, other than assurance that the promised good or service complies with agreed upon specifications, such warranty is accounted for as a separate performance obligation. In determining whether a warranty provides an additional service, the Company considers each warranty provision in comparison to warranty terms which are standard in the industry.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)
Our contracts are often modified through change orders to account for changes in the scope and price of the goods or services we are providing. Although the Company evaluates each change order to determine whether such modification creates a separate performance obligation, the majority of our change orders are for goods or services that are not distinct within the context of our original contract, and therefore, are not treated as separate performance obligations.
(3) Determine the transaction price
The transaction price represents the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to our customers. The consideration promised within a contract may include fixed amounts, variable amounts, or both. To the extent the performance obligation includes variable consideration, including contract bonuses and penalties that can either increase or decrease the transaction price, the Company estimates the amount of variable consideration to be included in the transaction price utilizing one of two prescribed methods, depending on which method better predicts the amount of consideration to which the entity will be entitled. Such methods include: (a) the expected value method, whereby the amount of variable consideration to be recognized represents the sum of probability weighted amounts in a range of possible consideration amounts, and (b) the most likely amount method, whereby the amount of variable consideration to be recognized represents the single most likely amount in a range of possible consideration amounts. When applying these methods, the Company considers all information that is reasonably available, including historical, current, and estimates of future performance. The expected value method is typically utilized in situations where a contract contains a large number of possible outcomes while the most likely amount method is typically utilized in situations where a contract has only two possible outcomes.
Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved. This threshold is referred to as the variable consideration constraint. In assessing whether to apply the variable consideration constraint, the Company considers if factors exist that could increase the likelihood or the magnitude of a potential reversal of revenue, including, but not limited to, whether: (a) the amount of consideration is highly susceptible to factors outside of the Company’s influence, such as the actions of third parties, (b) the uncertainty surrounding the amount of consideration is not expected to be resolved for a long period of time, (c) the Company’s experience with similar types of contracts is limited or that experience has limited predictive value, (d) the Company has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances, and (e) the contract has a large number and broad range of possible consideration amounts.
Pending change orders represent one of the most common forms of variable consideration included within contract value and typically represent contract modifications for which a change in scope has been authorized or acknowledged by our customer but the final adjustment to contract price is yet to be negotiated. In estimating the transaction price for pending change orders, the Company considers all relevant facts, including documented correspondence with the customer regarding acknowledgment of and/or agreement with the modification, as well as historical experience with the customer or similar contractual circumstances. Based upon this assessment, the Company estimates the transaction price, including whether the variable consideration constraint should be applied.
Contract claims are another form of variable consideration which is common within our industry. Claim amounts represent revenue that has been recognized for contract modifications that are not submitted or are in dispute as to both scope and price. In estimating the transaction price for claims, the Company considers all relevant facts available. However, given the uncertainty surrounding claims, including the potential long-term nature of dispute resolution and the broad range of possible consideration amounts, there is an increased likelihood that any additional contract revenue associated with contract claims is constrained. The resolution of claims involves negotiations and, in certain cases, litigation. In the event litigation costs are incurred by us in connection with claims, such litigation costs are expensed as incurred, although we may seek to recover these costs.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)
For some transactions, the receipt of consideration does not match the timing of the transfer of goods or services to the customer. For such contracts, the Company evaluates whether this timing difference represents a financing arrangement within the contract. Although rare, if a contract is determined to contain a significant financing component, the Company adjusts the promised amount of consideration for the effects of the time value of money when determining the transaction price of such contract. Although our customers may retain a portion of the contract price until completion of the project and final contract settlement, these retainage amounts are not considered a significant financing component as the intent of the withheld amounts is to provide the customer with assurance that we will complete our obligations under the contract rather than to provide financing to the customer. In addition, although we may be entitled to advanced payments from our customers on certain contracts, these advanced payments generally do not represent a significant financing component as the payments are used to meet working capital demands that can be higher in the early stages of a contract, as well as to protect us from our customer failing to meet its obligations under the contract.
Changes in the estimates of transaction prices are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in prior periods. Such changes in estimates may also result in the reversal of previously recognized revenue if the ultimate outcome differs from the Company’s previous estimate. During the year ended December 31, 2020, we recognized revenue of $6.1 million associated with the final settlement of contract value for two projects within our United States electrical construction and facilities services segment that were completed or substantially completed in prior periods. There were no significant amounts of revenue recognized during the year ended December 31, 2019 related to performance obligations satisfied in prior periods. During the year ended December 31, 2018, we recognized revenue of $7.3 million associated with the final settlement of contract value for three projects within our United States mechanical construction and facilities services segment that were completed in prior periods. For each of the years ended December 31, 2020, 2019, and 2018, there were no significant reversals of revenue recognized associated with the revision of transaction prices.
(4) Allocate the transaction price to performance obligations in the contract
For contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation based on a relative standalone selling price. The Company determines the standalone selling price based on the price at which the performance obligation would have been sold separately in similar circumstances to similar customers. If the standalone selling price is not observable, the Company estimates the standalone selling price taking into account all available information such as market conditions and internal pricing guidelines. In certain circumstances, the standalone selling price is determined using an expected profit margin on anticipated costs related to the performance obligation.
(5) Recognize revenue as performance obligations are satisfied
The Company recognizes revenue at the time the related performance obligation is satisfied by transferring a promised good or service to its customers. A good or service is considered to be transferred when the customer obtains control. The Company can transfer control of a good or service and satisfy its performance obligations either over time or at a point in time. The Company transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance as we perform, (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) the Company’s performance does not create an asset with an alternative use to us, and we have an enforceable right to payment for performance completed to date.
For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input method or an output method and requires judgment based on the nature of the goods or services to be provided.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)
For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced. Our fixed price construction projects generally use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. For our unit price construction contracts, progress towards complete satisfaction is measured through an output method, such as the amount of units produced or delivered, when our performance does not produce significant amounts of work in process or finished goods prior to complete satisfaction of such performance obligations.
For our services contracts, revenue is also generally recognized over time as the customer simultaneously receives and consumes the benefits of our performance as we perform the service. For our fixed price service contracts with specified service periods, revenue is generally recognized on a straight-line basis over such service period when our inputs are expended evenly, and the customer receives and consumes the benefits of our performance throughout the contract term.
The timing of revenue recognition for the manufacturing of new build heat exchangers within our United States industrial services segment depends on the payment terms of the contract, as our performance does not create an asset with an alternative use to us. For those contracts for which we have a right to payment for performance completed to date at all times throughout our performance, inclusive of a cancellation, we recognize revenue over time. For these performance obligations, we use a cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. However, for those contracts for which we do not have a right, at all times, to payment for performance completed to date, we recognize revenue at the point in time when control is transferred to the customer. For bill-and-hold arrangements, revenue is recognized when the customer obtains control of the heat exchanger, which may be prior to shipping, if certain recognition criteria are met.
For certain of our revenue streams, such as call-out repair and service work, outage services, refinery turnarounds, and specialty welding services that are performed under time and materials contracts, our progress towards complete satisfaction of such performance obligations is measured using an output method as the customer receives and consumes the benefits of our performance completed to date.
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised in the near-term. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident. During each of the years ended December 31, 2020 and 2019, there were no changes in total estimated costs that had a significant impact on our operating results. For the year ended December 31, 2018, we recognized losses of $10.0 million related to a change in total estimated costs on a transportation project within our United States electrical construction and facilities services segment, resulting in part from contract scope issues.
Disaggregation of Revenues
Our revenues are principally derived from contracts to provide construction services relating to electrical and mechanical systems, as well as to provide a number of building services and industrial services to our customers. Our contracts are with many different customers in numerous industries. Refer to Note 19 - Segment Information of the notes to the consolidated financial statements for additional information on how we disaggregate our revenues by reportable segment, as well as a more complete description of our business.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)
The following tables provide further disaggregation of our revenues by categories we use to evaluate our financial performance within each of our reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Total
|
|
2019
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
United States electrical construction and facilities services:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial market sector
|
$
|
971,283
|
|
|
49
|
%
|
|
$
|
1,081,737
|
|
|
49
|
%
|
|
$
|
839,045
|
|
|
43
|
%
|
Institutional market sector
|
149,363
|
|
|
7
|
%
|
|
125,537
|
|
|
6
|
%
|
|
110,046
|
|
|
6
|
%
|
Hospitality market sector
|
23,797
|
|
|
1
|
%
|
|
16,985
|
|
|
1
|
%
|
|
32,338
|
|
|
2
|
%
|
Manufacturing market sector
|
381,542
|
|
|
19
|
%
|
|
462,953
|
|
|
21
|
%
|
|
388,157
|
|
|
20
|
%
|
Healthcare market sector
|
79,275
|
|
|
4
|
%
|
|
88,752
|
|
|
4
|
%
|
|
126,218
|
|
|
6
|
%
|
Transportation market sector
|
192,656
|
|
|
10
|
%
|
|
210,515
|
|
|
9
|
%
|
|
284,464
|
|
|
14
|
%
|
Water and wastewater market sector
|
6,882
|
|
|
1
|
%
|
|
19,921
|
|
|
1
|
%
|
|
23,337
|
|
|
1
|
%
|
Short duration projects (1)
|
121,061
|
|
|
6
|
%
|
|
158,619
|
|
|
7
|
%
|
|
120,109
|
|
|
6
|
%
|
Service work
|
52,687
|
|
|
3
|
%
|
|
54,955
|
|
|
2
|
%
|
|
34,105
|
|
|
2
|
%
|
|
1,978,546
|
|
|
|
|
2,219,974
|
|
|
|
|
1,957,819
|
|
|
|
Less intersegment revenues
|
(5,119)
|
|
|
|
|
(3,374)
|
|
|
|
|
(3,496)
|
|
|
|
Total segment revenues
|
$
|
1,973,427
|
|
|
|
|
$
|
2,216,600
|
|
|
|
|
$
|
1,954,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Total
|
|
2019
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
United States mechanical construction and facilities services:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial market sector
|
$
|
1,316,013
|
|
|
38
|
%
|
|
$
|
1,185,129
|
|
|
36
|
%
|
|
$
|
1,057,542
|
|
|
35
|
%
|
Institutional market sector
|
377,780
|
|
|
11
|
%
|
|
313,409
|
|
|
9
|
%
|
|
289,882
|
|
|
10
|
%
|
Hospitality market sector
|
40,079
|
|
|
1
|
%
|
|
35,385
|
|
|
1
|
%
|
|
93,827
|
|
|
3
|
%
|
Manufacturing market sector
|
430,365
|
|
|
12
|
%
|
|
533,699
|
|
|
16
|
%
|
|
393,637
|
|
|
13
|
%
|
Healthcare market sector
|
349,235
|
|
|
10
|
%
|
|
304,622
|
|
|
9
|
%
|
|
240,818
|
|
|
8
|
%
|
Transportation market sector
|
70,692
|
|
|
2
|
%
|
|
32,686
|
|
|
1
|
%
|
|
19,415
|
|
|
1
|
%
|
Water and wastewater market sector
|
185,996
|
|
|
5
|
%
|
|
202,428
|
|
|
6
|
%
|
|
176,546
|
|
|
6
|
%
|
Short duration projects (1)
|
343,799
|
|
|
10
|
%
|
|
365,721
|
|
|
11
|
%
|
|
318,413
|
|
|
11
|
%
|
Service work
|
378,054
|
|
|
11
|
%
|
|
378,839
|
|
|
11
|
%
|
|
385,671
|
|
|
13
|
%
|
|
3,492,013
|
|
|
|
|
3,351,918
|
|
|
|
|
2,975,751
|
|
|
|
Less intersegment revenues
|
(6,518)
|
|
|
|
|
(11,581)
|
|
|
|
|
(12,908)
|
|
|
|
Total segment revenues
|
$
|
3,485,495
|
|
|
|
|
$
|
3,340,337
|
|
|
|
|
$
|
2,962,843
|
|
|
|
________
(1)Represents those projects which generally are completed within three months or less.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Total
|
|
2019
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
United States building services:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial site-based services
|
$
|
587,345
|
|
|
28
|
%
|
|
$
|
571,345
|
|
|
27
|
%
|
|
$
|
519,641
|
|
|
28
|
%
|
Government site-based services
|
167,990
|
|
|
8
|
%
|
|
176,282
|
|
|
8
|
%
|
|
213,677
|
|
|
11
|
%
|
Mobile mechanical services
|
1,258,916
|
|
|
60
|
%
|
|
1,238,420
|
|
|
59
|
%
|
|
1,032,082
|
|
|
55
|
%
|
Energy services
|
95,878
|
|
|
4
|
%
|
|
120,825
|
|
|
6
|
%
|
|
110,085
|
|
|
6
|
%
|
Total segment revenues
|
$
|
2,110,129
|
|
|
|
|
$
|
2,106,872
|
|
|
|
|
$
|
1,875,485
|
|
|
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Total
|
|
2019
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
United States industrial services:
|
|
|
|
|
|
|
|
|
|
|
|
Field services
|
$
|
670,424
|
|
|
84
|
%
|
|
$
|
922,308
|
|
|
85
|
%
|
|
$
|
752,458
|
|
|
82
|
%
|
Shop services
|
127,023
|
|
|
16
|
%
|
|
165,235
|
|
|
15
|
%
|
|
170,651
|
|
|
18
|
%
|
Total segment revenues
|
$
|
797,447
|
|
|
|
|
$
|
1,087,543
|
|
|
|
|
$
|
923,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total United States operations
|
$
|
8,366,498
|
|
|
|
|
$
|
8,751,352
|
|
|
|
|
$
|
7,715,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
% of
Total
|
|
2019
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
United Kingdom building services:
|
|
|
|
|
|
|
|
|
|
|
|
Service work
|
$
|
221,373
|
|
|
51
|
%
|
|
$
|
212,876
|
|
|
50
|
%
|
|
$
|
216,880
|
|
|
52
|
%
|
Project work
|
209,190
|
|
|
49
|
%
|
|
210,383
|
|
|
50
|
%
|
|
197,991
|
|
|
48
|
%
|
Total segment revenues
|
$
|
430,563
|
|
|
|
|
$
|
423,259
|
|
|
|
|
$
|
414,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operations
|
$
|
8,797,061
|
|
|
|
|
$
|
9,174,611
|
|
|
|
|
$
|
8,130,631
|
|
|
|
Contract Assets and Contract Liabilities
Accounts receivable are recognized in the period when our right to consideration is unconditional. Accounts receivable are recognized net of an allowance for credit losses. A considerable amount of judgment is required in assessing the likelihood of realization of receivables.
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our long-term construction projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to our customers, as the amounts cannot be billed under the terms of our contracts. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the United States industrial services segment, are billed in arrears pursuant to contract terms that are standard within the industry, resulting in contract assets and/or unbilled receivables being recorded as revenue is recognized in advance of billings. Also included in contract assets are amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders or modifications in dispute or unapproved as to scope and/or price, or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Our contract assets do not include capitalized costs to obtain and fulfill a contract. Contract assets are generally classified as current within the Consolidated Balance Sheets.
As of December 31, 2020 and 2019, contract assets included unbilled revenues for unapproved change orders of approximately $15.3 million and $33.1 million, respectively. As of December 31, 2020 and 2019, there were no claim amounts included within contract assets or accounts receivable. There were contractually billed amounts and retention related to contracts with unapproved change orders and claims of approximately $87.9 million and $89.0 million as of December 31, 2020 and 2019, respectively. For contracts in claim status, contractually billed amounts will generally not be paid by the customer to us until final resolution of the related claims.
Contract liabilities from our long-term construction contracts arise when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue. The long-term portion of contract liabilities is included in “Other long-term obligations” in the Consolidated Balance Sheets.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)
Net contract liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Contract assets, current
|
$
|
171,956
|
|
|
$
|
177,830
|
|
Contract assets, non-current
|
—
|
|
|
—
|
|
Contract liabilities, current
|
(722,252)
|
|
|
(623,642)
|
|
Contract liabilities, non-current
|
(2,283)
|
|
|
(2,142)
|
|
Net contract liabilities
|
$
|
(552,579)
|
|
|
$
|
(447,954)
|
|
Included within net contract liabilities were $496.8 million and $406.6 million of net contract liabilities on uncompleted construction projects as of December 31, 2020 and 2019, respectively, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Costs incurred on uncompleted construction contracts
|
$
|
10,727,358
|
|
|
$
|
9,885,192
|
|
Estimated earnings, thereon
|
1,640,250
|
|
|
1,349,338
|
|
|
12,367,608
|
|
|
11,234,530
|
|
Less: billings to date
|
12,864,404
|
|
|
11,641,082
|
|
|
$
|
(496,796)
|
|
|
$
|
(406,552)
|
|
The $104.6 million increase in net contract liabilities for the year ended December 31, 2020 was primarily attributable to the $90.2 million increase in the net contract liabilities on our uncompleted long-term construction contracts, partially as a result of the timing of billings to our customers as amounts invoiced exceeded the revenue recognized on certain large projects. Contract assets and contract liabilities increased by approximately $0.2 million and $9.4 million, respectively, as a result of acquisitions made by us in 2020. There was no significant impairment of contract assets recognized during the periods presented.
Contract Retentions
As of December 31, 2020 and 2019, accounts receivable included $323.9 million and $298.5 million, respectively, of retainage billed under terms of our contracts. These retainage amounts represent amounts which have been contractually invoiced to customers where payments have been partially withheld pending the achievement of certain milestones, satisfaction of other contractual conditions, or completion of the project. We estimate that approximately 89% of this retainage will be collected during 2021.
As of December 31, 2020 and 2019, accounts payable included $59.8 million and $64.7 million, respectively, of retainage withheld under terms of our subcontracts. These retainage amounts represent amounts invoiced to the Company by our subcontractors where payments have been partially withheld pending the achievement of certain milestones, satisfaction of other contractual conditions, or upon completion of the project. We estimate that approximately 90% of this retainage will be paid during 2021.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)
Transaction Price Allocated to Remaining Unsatisfied Performance Obligations
The following table presents the transaction price allocated to remaining unsatisfied performance obligations (“remaining performance obligations”) for each of our reportable segments and their respective percentages of total remaining performance obligations (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
% of Total
|
Remaining performance obligations:
|
|
|
|
United States electrical construction and facilities services
|
$
|
1,087,238
|
|
|
24
|
%
|
United States mechanical construction and facilities services
|
2,673,293
|
|
|
58
|
%
|
United States building services
|
612,179
|
|
|
13
|
%
|
United States industrial services
|
91,237
|
|
|
2
|
%
|
Total United States operations
|
4,463,947
|
|
|
97
|
%
|
United Kingdom building services
|
130,673
|
|
|
3
|
%
|
Total operations
|
$
|
4,594,620
|
|
|
100
|
%
|
Our remaining performance obligations at December 31, 2020 were $4.59 billion. Remaining performance obligations increase with awards of new contracts and decrease as we perform work and recognize revenue on existing contracts. We include a project within our remaining performance obligations at such time the project is awarded and agreement on contract terms has been reached. Our remaining performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of total transaction price can be made.
Remaining performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of our construction contracts are subject to cancellation at the election of our customers, in accordance with industry practice, we do not limit the amount of unrecognized revenue included within remaining performance obligations for these contracts as the risk of cancellation is very low due to the inherent substantial economic penalty that our customers would incur upon cancellation or termination. We believe our reported remaining performance obligations for our construction contracts are firm and contract cancellations have not had a material adverse effect on us.
Remaining performance obligations also include unrecognized revenues expected to be realized over the remaining term of service contracts. However, to the extent a service contract includes a cancellation clause which allows for the termination of such contract by either party without a substantive penalty, the remaining contract term, and therefore, the amount of unrecognized revenues included within remaining performance obligations, is limited to the notice period required for the termination.
Our remaining performance obligations are comprised of: (a) original contract amounts, (b) change orders for which we have received written confirmations from our customers, (c) pending change orders for which we expect to receive confirmations in the ordinary course of business, (d) claim amounts that we have made against customers for which we have determined we have a legal basis under existing contractual arrangements and as to which the variable consideration constraint does not apply, and (e) other forms of variable consideration to the extent that such variable consideration has been included within the transaction price of our contracts. Such claim and other variable consideration amounts were immaterial for all periods presented.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - REVENUE FROM CONTRACTS WITH CUSTOMERS - (Continued)
Refer to the table below for additional information regarding our remaining performance obligations, including an estimate of when we expect to recognize such remaining performance obligations as revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
|
Greater than one year
|
Remaining performance obligations:
|
|
|
|
United States electrical construction and facilities services
|
$
|
946,735
|
|
|
$
|
140,503
|
|
United States mechanical construction and facilities services
|
2,122,777
|
|
|
550,516
|
|
United States building services
|
559,159
|
|
|
53,020
|
|
United States industrial services
|
91,237
|
|
|
—
|
|
Total United States operations
|
3,719,908
|
|
|
744,039
|
|
United Kingdom building services
|
97,493
|
|
|
33,180
|
|
Total operations
|
$
|
3,817,401
|
|
|
$
|
777,219
|
|
NOTE 4 - ACQUISITIONS OF BUSINESSES
Acquisitions are accounted for utilizing the acquisition method of accounting and the prices paid for them are allocated to their respective assets and liabilities based upon the estimated fair value of such assets and liabilities at the dates of their respective acquisition by us.
During 2020, we acquired three companies for total consideration of $50.2 million. Such companies include: (a) a company that provides building automation and controls solutions within the Northeastern region of the United States, (b) a full service provider of mechanical services within the Washington, D.C. metro area, and (c) a company that provides mobile mechanical services in the Southern region of the United States. The results of operations for all three companies have been included within our United States building services segment. In connection with these acquisitions, we acquired working capital of $3.0 million and other net liabilities of $3.9 million and have preliminarily ascribed $13.0 million to goodwill and $38.1 million to identifiable intangible assets.
On November 1, 2019, we completed the acquisition of Batchelor & Kimball, Inc. (“BKI”), a leading full service provider of mechanical construction and maintenance services. This acquisition strengthens our position and broadens our capabilities in the Southern and Southeastern regions of the United States, and the results of its operations have been included within our United States mechanical construction and facilities services segment. Under the terms of the transaction, we acquired 100% of BKI’s outstanding capital stock for total consideration of approximately $220.3 million. In connection with the acquisition of BKI, we acquired working capital of $29.8 million and other net assets of $4.9 million and have ascribed $43.9 million to goodwill and $141.7 million to identifiable intangible assets. Goodwill is calculated as the excess of the consideration transferred over the fair value of the net assets acquired and represents the future economic benefits expected from this strategic acquisition. The weighted average amortization period for the identifiable intangible assets, which consist of a trade name, customer relationships, and contract backlog, is approximately 10.5 years.
In addition to BKI, during 2019, we completed six other acquisitions for total consideration of $85.4 million. Such companies include: (a) a company that provides electrical contracting services in central Iowa, the results of operations of which have been included within our United States electrical construction and facilities services segment, (b) a company that provides mechanical contracting services in south-central and eastern Texas, the results of operations of which have been included within our United States mechanical construction and facilities services segment, and (c) four companies within our United States building services segment which bolster our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions. In connection with these acquisitions, we acquired working capital of $25.3 million and other net assets of $1.3 million and have ascribed $29.2 million to goodwill and $29.6 million to identifiable intangible assets.
During 2018, we acquired four companies for total consideration of $71.6 million. Two companies provide mobile mechanical services, one within the Eastern region and the other within the Western region of the United States. The third company is a full service provider of mechanical services within the Southern region of the United States. The results of these three companies have been included in our United States building services segment. The fourth company provides electrical construction and maintenance services for industrial and commercial buildings in north Texas, and the results of its operations have been included in our United States electrical construction and facilities services segment. In connection with these acquisitions, we acquired working capital of $8.7 million and have ascribed $26.3 million to goodwill and $36.6 million to identifiable intangible assets.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - ACQUISITIONS OF BUSINESSES - (Continued)
We expect that all of the goodwill acquired in connection with these acquisitions will be deductible for tax purposes. The purchase price allocation for one of the businesses acquired in 2020 is preliminary and subject to change during its measurement period. As we finalize such purchase price allocation, adjustments may be recorded relating to finalization of intangible asset valuations, tax matters, or other items. Although not expected to be significant, such adjustments may result in changes in the valuation of assets and liabilities acquired. The purchase price allocations for the other businesses acquired in 2020 and the businesses acquired in 2019 and 2018 have been finalized during their respective measurement periods with an insignificant impact.
NOTE 5 - DISPOSITION OF ASSETS
Due to a historical pattern of losses in the construction operations of our United Kingdom segment and our negative assessment of construction market conditions in the United Kingdom, we ceased construction operations in the United Kingdom during the third quarter of 2014. The results of the construction operations of our United Kingdom segment for all periods are presented in the Consolidated Financial Statements as discontinued operations.
No income or expense was recognized from discontinued operations for the years ended December 31, 2020 and 2019.
The results of discontinued operations for the year ended December 31, 2018 were as follows (in thousands):
|
|
|
|
|
|
|
2018
|
Revenues
|
$
|
—
|
|
Loss from discontinued operation, net of income taxes
|
$
|
(2,345)
|
|
Diluted loss per share from discontinued operation
|
$
|
(0.04)
|
|
The loss from discontinued operations in 2018 was primarily due to the settlement of a previously outstanding legal matter.
NOTE 6 - EARNINGS PER SHARE
The following tables summarize our calculation of Basic and Diluted Earnings (Loss) per Common Share (“EPS”) for the years ended December 31, 2020, 2019, and 2018 (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
Income from continuing operations attributable to EMCOR Group, Inc. common stockholders
|
$
|
132,943
|
|
|
$
|
325,140
|
|
|
$
|
285,876
|
|
Loss from discontinued operation, net of income taxes
|
—
|
|
|
—
|
|
|
(2,345)
|
|
Net income attributable to EMCOR Group, Inc. common stockholders
|
$
|
132,943
|
|
|
$
|
325,140
|
|
|
$
|
283,531
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding used to compute basic earnings (loss) per common share
|
55,196,173
|
|
|
56,208,280
|
|
|
58,112,838
|
|
Effect of dilutive securities—Share-based awards
|
225,098
|
|
|
311,001
|
|
|
330,629
|
|
Shares used to compute diluted earnings (loss) per common share
|
55,421,271
|
|
|
56,519,281
|
|
|
58,443,467
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
From continuing operations attributable to EMCOR Group, Inc. common stockholders
|
$
|
2.41
|
|
|
$
|
5.78
|
|
|
$
|
4.92
|
|
From discontinued operation
|
—
|
|
|
—
|
|
|
(0.04)
|
|
Net income attributable to EMCOR Group, Inc. common stockholders
|
$
|
2.41
|
|
|
$
|
5.78
|
|
|
$
|
4.88
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
From continuing operations attributable to EMCOR Group, Inc. common stockholders
|
$
|
2.40
|
|
|
$
|
5.75
|
|
|
$
|
4.89
|
|
From discontinued operation
|
—
|
|
|
—
|
|
|
(0.04)
|
|
Net income attributable to EMCOR Group, Inc. common stockholders
|
$
|
2.40
|
|
|
$
|
5.75
|
|
|
$
|
4.85
|
|
The number of outstanding share-based awards excluded from the computation of diluted EPS for the years ended December 31, 2020, 2019, and 2018 because they would be anti-dilutive were 24,450, 4,800, and 550, respectively.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INVENTORIES
Inventories as of December 31, 2020 and 2019 consisted of the following amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Raw materials and construction materials
|
$
|
42,240
|
|
|
$
|
31,365
|
|
Work in process
|
11,098
|
|
|
9,081
|
|
Inventories
|
$
|
53,338
|
|
|
$
|
40,446
|
|
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2020 and 2019 consisted of the following amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Machinery and equipment
|
$
|
176,031
|
|
|
$
|
166,087
|
|
Vehicles
|
61,624
|
|
|
59,116
|
|
Furniture and fixtures
|
23,724
|
|
|
22,123
|
|
Computer hardware/software
|
111,846
|
|
|
104,916
|
|
Land, buildings and leasehold improvements
|
124,309
|
|
|
113,020
|
|
Construction in progress
|
7,754
|
|
|
10,236
|
|
Finance lease right-of-use assets (1)
|
9,638
|
|
|
9,609
|
|
|
514,926
|
|
|
485,107
|
|
Accumulated depreciation and amortization
|
(356,499)
|
|
|
(328,920)
|
|
|
$
|
158,427
|
|
|
$
|
156,187
|
|
_________________
(1)Finance lease right-of-use assets are recorded net of accumulated amortization.
Depreciation and amortization expense related to property, plant and equipment, including finance leases, was $46.7 million, $43.9 million, and $38.5 million for the years ended December 31, 2020, 2019, and 2018, respectively.
NOTE 9 - GOODWILL, IDENTIFIABLE INTANGIBLE ASSETS, AND OTHER LONG-LIVED ASSETS
Goodwill
In connection with our acquisition of businesses, we have recorded goodwill, which represents the excess of the consideration transferred over the fair value of the net tangible and identifiable intangible assets acquired. Our goodwill balance at December 31, 2020 and 2019 was $851.8 million and $1,063.9 million, respectively, with goodwill attributable to companies acquired in 2020 and 2019 valued at $13.0 million and $73.1 million, respectively. Goodwill is not amortized but instead allocated to its respective reporting unit and evaluated for impairment annually, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. We have determined that our reporting units are consistent with the reportable segments identified in Note 19 - Segment Information of the notes to consolidated financial statements. As of December 31, 2020, approximately 16.7% of our goodwill related to our United States electrical construction and facilities services segment, approximately 35.2% of our goodwill related to our United States mechanical construction and facilities services segment, approximately 35.5% of our goodwill related to our United States building services segment and approximately 12.6% of our goodwill related to our United States industrial services segment.
Absent any earlier identified impairment indicators, we perform our annual goodwill impairment assessment on October 1 each fiscal year. Qualitative indicators that may trigger the need for interim quantitative impairment testing include, among others, a deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, an interim impairment test may be triggered by a significant change in business climate, a loss of a significant customer, increased competition, or a sustained decrease in share price. In assessing whether our goodwill is impaired, we compare the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment is recognized. However, if the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired and an impairment loss in the amount of the excess is recognized and charged to operations.
Our operations were significantly impacted by the COVID-19 pandemic starting with the second quarter of 2020. During the same period, the demand for oil significantly deteriorated as a result of the pandemic and the corresponding preventative measures taken around the world to mitigate the spread of the virus, including various local, state, and national jurisdictional
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - GOODWILL, IDENTIFIABLE INTANGIBLE ASSETS, AND OTHER LONG-LIVED ASSETS - (Continued)
“shelter-in-place” orders. Further, other macroeconomic events, including the escalation of geopolitical tensions between the Organization of Petroleum Exporting Countries (OPEC) and Russia, resulted in a significant drop in the price of crude oil. These negative factors created significant volatility and uncertainty in the markets in which our United States industrial services segment operates, resulting in a significant decrease in the demand for our service offerings. Consequently, in the second quarter of 2020, we revised our near-term revenue and operating margin expectations for our United States industrial services segment and concluded that a triggering event had occurred which indicated it was more likely than not that the fair value of our United States industrial services segment was less than its carrying amount.
Accordingly, we performed a quantitative goodwill impairment test and determined the fair value of our United States industrial services segment using an income approach whereby fair value was calculated utilizing discounted estimated future cash flows, assuming a risk-adjusted industry weighted average cost of capital of 12.0%. Such weighted average cost of capital was developed with the assistance of an independent third-party valuation specialist and reflected the overall level of inherent risk within the business and the rate of return a market participant would expect to earn as of the interim date. Cash flow projections were derived from internal forecasts of anticipated revenue growth rates and operating margins, updated for the events discussed above, with cash flows beyond the discrete forecast period estimated using a terminal value calculation which incorporated historical and forecasted trends, an estimate of long-term growth rates, and assumptions about the future demand for our services. The perpetual growth rate utilized in the interim terminal value calculation was 2.0%.
Based on the outcome of our interim goodwill impairment test, we concluded that the carrying amount of our United States industrial services segment exceeded its fair value, resulting in the recognition of a non-cash goodwill impairment charge of $225.5 million, which is included within our results of operations for the year ended December 31, 2020. We did not identify impairment indicators related to any other reporting unit that would have required an interim impairment assessment.
As of October 1, 2020, we performed our annual impairment assessment of all reporting units and determined there was no incremental impairment of goodwill. Consistent with the methodology applied in our interim impairment test, we determined the fair value of each of our reporting units using an income approach whereby fair value was calculated utilizing discounted estimated future cash flows, assuming a risk-adjusted industry weighted average cost of capital. The weighted average cost of capital used in our annual impairment testing was 10.6%, 10.4%, and 11.6% for our United States construction segments, our United States building services segment, and our United States industrial services segment, respectively. These weighted average cost of capital estimates were developed with the assistance of an independent third-party valuation specialist and reflect the overall level of inherent risk within the respective reporting unit and the rate of return a market participant would expect to earn. Our cash flow projections were derived from our most recent internal forecasts of anticipated revenue growth rates and operating margins, with cash flows beyond the discrete forecast period estimated using a terminal value calculation which incorporated historical and forecasted trends, an estimate of long-term growth rates, and assumptions about the future demand for our services. The perpetual growth rate used for our annual testing was 2.0% for all of our reporting units.
Due to the inherent uncertainties involved in making estimates, our assumptions may change in future periods. Estimates and assumptions made for purposes of our goodwill impairment testing may prove to be inaccurate predictions of the future, and other factors used in assessing fair value, such as the weighted average cost of capital, are outside the control of management. Unfavorable changes in certain of these key assumptions may affect future testing results. For example, keeping all other assumptions constant, a 50 basis point increase in the weighted average cost of capital would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment to decrease by approximately $63.3 million, $115.9 million, $69.9 million, and $23.2 million, respectively. In addition, keeping all other assumptions constant, a 50 basis point reduction in the perpetual growth rate would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment, and our United States industrial services segment to decrease by approximately $31.0 million, $58.9 million, $33.5 million, and $9.7 million, respectively. Given the amounts by which the fair value exceeds the carrying value for each of our reporting units other than our United States industrial services segment, the decreases in estimated fair values described above would not have significantly impacted the results of our impairment tests. In the case of our United States industrial services segment, however, such decreases would cause the estimated fair value of such reporting unit to approximate its carrying value. Significant adverse changes to external market conditions or our internal forecasts, if any, could result in future goodwill impairment charges. It is not possible at this time to determine if any future impairment charge will result or, if it does, whether such a charge would be material to our results of operations.
For the years ended December 31, 2019 and 2018, no impairment of our goodwill was recognized.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - GOODWILL, IDENTIFIABLE INTANGIBLE ASSETS, AND OTHER LONG-LIVED ASSETS - (Continued)
The changes in the carrying amount of goodwill by reportable segment during the years ended December 31, 2020 and 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
electrical
construction
and facilities
services segment
|
|
United States
mechanical
construction
and facilities
services segment
|
|
United States
building
services segment
|
|
United States
industrial services segment
|
|
Total
|
Balance at December 31, 2018
|
$
|
133,207
|
|
|
$
|
256,321
|
|
|
$
|
274,171
|
|
|
$
|
327,188
|
|
|
$
|
990,887
|
|
Acquisitions and purchase price adjustments
|
9,338
|
|
|
48,699
|
|
|
14,987
|
|
|
—
|
|
|
73,024
|
|
Intersegment transfers
|
—
|
|
|
(5,800)
|
|
|
—
|
|
|
5,800
|
|
|
—
|
|
Balance at December 31, 2019
|
142,545
|
|
|
299,220
|
|
|
289,158
|
|
|
332,988
|
|
|
1,063,911
|
|
Acquisitions and purchase price adjustments
|
—
|
|
|
398
|
|
|
12,974
|
|
|
—
|
|
|
13,372
|
|
Impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
(225,500)
|
|
|
(225,500)
|
|
Balance at December 31, 2020
|
$
|
142,545
|
|
|
$
|
299,618
|
|
|
$
|
302,132
|
|
|
$
|
107,488
|
|
|
$
|
851,783
|
|
The aggregate goodwill balance as of December 31, 2018 included $268.1 million of accumulated impairment charges, which were comprised of $139.5 million within the United States building services segment and $128.6 million within the United States industrial services segment.
Identifiable Intangible Assets and Other Long-Lived Assets
Our identifiable intangible assets, arising out of the acquisition of businesses, include contract backlog, developed technology/vendor network, customer relationships, and certain subsidiary trade names, all of which are subject to amortization. In addition, our identifiable intangible assets include certain other subsidiary trade names, which are indefinite-lived and therefore not subject to amortization.
Absent earlier indicators of impairment, we test for impairment of subsidiary trade names that are not subject to amortization on an annual basis (October 1). In performing this test, we calculate the fair value of each trade name using the “relief from royalty payments” methodology. This approach involves two steps: (a) estimating reasonable royalty rates for each trade name and (b) applying these royalty rates to a net revenue stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each trade name. If the carrying amount of the trade name is greater than the implied fair value of the trade name, an impairment in the amount of the excess is recognized and charged to operations. In addition, we review for impairment of identifiable intangible assets that are being amortized as well as other long-lived assets whenever facts and circumstances indicate that their carrying values may not be fully recoverable. This test compares their carrying values to the undiscounted pre-tax cash flows expected to result from the use of the assets. If the assets are impaired, the assets are written down to their fair values, generally determined based on their discounted estimated future cash flows.
Given the negative market conditions disclosed above, we also evaluated certain of our identifiable intangible assets and other long-lived assets for impairment during the second quarter of 2020. Such assets included those associated with the businesses in our United States industrial services segment and certain businesses within our United States electrical construction and facilities services segment whose results are also highly dependent on the strength of the oil and gas industry. As a result of these assessments, we recorded non-cash impairment charges of $7.3 million, which have been included within our results of operations for the year ended December 31, 2020. Of this amount, $4.8 million related to our United States industrial services segment and was comprised of: (a) a $4.2 million subsidiary trade name impairment and (b) a $0.6 million impairment on certain other long-lived assets. The remaining $2.5 million represented a subsidiary trade name impairment within our United States electrical construction and facilities services segment.
As of October 1, 2020, we performed our annual impairment testing of all subsidiary trade names that are not subject to amortization and determined that there was no incremental impairment of these assets. For the years ended December 31, 2019 and 2018, no impairment of our indefinite-lived trade names was recognized.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - GOODWILL, IDENTIFIABLE INTANGIBLE ASSETS, AND OTHER LONG-LIVED ASSETS - (Continued)
With respect to identifiable intangible assets that are being amortized as well as other long-lived assets, we did not identify any further circumstances indicating that their carrying values may not be fully recoverable and, therefore, no additional impairment testing was required for these assets during the year ended December 31, 2020. For the year ended December 31, 2019, no impairment of our finite-lived intangible assets or other long-lived assets was recognized. We recorded a $0.9 million non-cash impairment charge associated with a finite-lived trade name within our United States industrial services segment during the year ended December 31, 2018.
Identifiable intangible assets as of December 31, 2020 and 2019 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Accumulated
Impairment
Charge
|
|
Total
|
Contract backlog
|
$
|
72,045
|
|
|
$
|
(68,766)
|
|
|
$
|
—
|
|
|
$
|
3,279
|
|
Developed technology/Vendor network
|
95,661
|
|
|
(64,994)
|
|
|
—
|
|
|
30,667
|
|
Customer relationships
|
670,155
|
|
|
(324,426)
|
|
|
(4,834)
|
|
|
340,895
|
|
Trade names (amortized)
|
31,516
|
|
|
(23,002)
|
|
|
—
|
|
|
8,514
|
|
Trade names (unamortized)
|
258,471
|
|
|
—
|
|
|
(58,933)
|
|
|
199,538
|
|
Total
|
$
|
1,127,848
|
|
|
$
|
(481,188)
|
|
|
$
|
(63,767)
|
|
|
$
|
582,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Accumulated
Impairment
Charge
|
|
Total
|
Contract backlog
|
$
|
66,745
|
|
|
$
|
(61,651)
|
|
|
$
|
—
|
|
|
$
|
5,094
|
|
Developed technology/Vendor network
|
95,661
|
|
|
(60,156)
|
|
|
—
|
|
|
35,505
|
|
Customer relationships
|
644,755
|
|
|
(277,601)
|
|
|
(4,834)
|
|
|
362,320
|
|
Trade names (amortized)
|
31,148
|
|
|
(21,830)
|
|
|
—
|
|
|
9,318
|
|
Trade names (unamortized)
|
251,440
|
|
|
—
|
|
|
(52,233)
|
|
|
199,207
|
|
Total
|
$
|
1,089,749
|
|
|
$
|
(421,238)
|
|
|
$
|
(57,067)
|
|
|
$
|
611,444
|
|
Identifiable intangible assets attributable to businesses acquired in 2020 and 2019 have been valued at $38.1 million and $171.3 million, respectively, and consist of contract backlog, customer relationships, and trade names. See Note 4 - Acquisitions of Businesses of the notes to consolidated financial statements for additional information with respect to acquisitions.
Identifiable intangible assets are amortized on a straight-line basis, as it best approximates the pattern in which the economic benefits of such assets are consumed. The weighted average amortization periods for the unamortized balances remaining are, in the aggregate, approximately 7.75 years, which are comprised of the following: 0.75 years for contract backlog, 6.75 years for developed technology/vendor network, 8.00 years for customer relationships and 9.75 years for trade names.
Amortization expense related to identifiable intangible assets with finite lives was $60.0 million, $48.1 million, and $42.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. The following table presents the estimated future amortization expense of identifiable intangible assets in the following years (in thousands):
|
|
|
|
|
|
2021
|
$
|
56,502
|
|
2022
|
51,020
|
|
2023
|
50,015
|
|
2024
|
49,664
|
|
2025
|
48,582
|
|
Thereafter
|
127,572
|
|
|
$
|
383,355
|
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - DEBT
Credit Agreement
Until March 2, 2020, we had a credit agreement dated as of August 3, 2016, which provided for a $900.0 million revolving credit facility (the “2016 Revolving Credit Facility”) and a $400.0 million term loan (the “2016 Term Loan”) (collectively referred to as the “2016 Credit Agreement”). On March 2, 2020, we amended and restated the 2016 Credit Agreement to provide for a $1.3 billion revolving credit facility (the “2020 Revolving Credit Facility”) and a $300.0 million term loan (the “2020 Term Loan”) (collectively referred to as the “2020 Credit Agreement”) expiring March 2, 2025. We may increase the 2020 Revolving Credit Facility to $1.9 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $400.0 million of available capacity under the 2020 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries.
At the Company’s election, borrowings under the 2020 Credit Agreement bear interest at either: (1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2) United States dollar LIBOR (0.15% at December 31, 2020) plus 1.00% to 1.75%, based on certain financial tests. The base rate is determined by the greater of (a) the prime commercial lending rate announced by Bank of Montreal from time to time (3.25% at December 31, 2020), (b) the federal funds effective rate, plus ½ of 1.00%, (c) the daily one month LIBOR rate, plus 1.00%, or (d) 0.00%. The interest rate in effect at December 31, 2020 was 1.15%. A commitment fee is payable on the average daily unused amount of the 2020 Revolving Credit Facility, which ranges from 0.10% to 0.25%, based on certain financial tests. The fee was 0.10% of the unused amount as of December 31, 2020. Fees for letters of credit issued under the 2020 Revolving Credit Facility range from 0.75% to 1.75% of the respective face amounts of outstanding letters of credit, depending on the nature of the letter of credit, and are computed based on certain financial tests.
As of December 31, 2020 and 2019, the balance of the 2020 Term Loan and the 2016 Term Loan was $270.6 million and $254.4 million, respectively. As of December 31, 2020, there were no direct borrowings outstanding under the 2020 Revolving Credit Facility; however, we had $71.3 million of letters of credit outstanding, which reduce the available capacity under such facility. As of December 31, 2019, we had $50.0 million in direct borrowings outstanding and $109.0 million of letters of credit outstanding under the 2016 Revolving Credit Facility. We capitalized an additional $3.1 million of debt issuance costs associated with the 2020 Credit Agreement. Debt issuance costs are amortized over the life of the agreement and are included as part of interest expense.
Obligations under the 2020 Credit Agreement are guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets. The 2020 Credit Agreement contains various covenants providing for, among other things, the maintenance of certain financial ratios and certain limitations on the payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. We were in compliance with all such covenants as of December 31, 2020 with respect to the 2020 Credit Agreement and, as of December 31, 2019, with respect to the 2016 Credit Agreement.
We are required to make annual principal payments on the 2020 Term Loan. On September 30, 2020, we made a voluntary prepayment of $22.5 million, which was applied against our scheduled payments on a ratable basis. Principal payments of $13.9 million are due on December 31 of each subsequent year. All unpaid principal and interest is due on March 2, 2025.
Long-term debt as of December 31, 2020 and 2019 consisted of the following amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Revolving credit facility
|
$
|
—
|
|
|
$
|
50,000
|
|
Term loan, interest payable at varying amounts through 2025
|
270,563
|
|
|
254,431
|
|
Unamortized debt issuance costs
|
(4,000)
|
|
|
(1,879)
|
|
Finance lease liabilities
|
9,966
|
|
|
9,679
|
|
Total debt
|
276,529
|
|
|
312,231
|
|
Less: current maturities
|
16,910
|
|
|
18,092
|
|
Total long-term debt
|
$
|
259,619
|
|
|
$
|
294,139
|
|
Finance Lease Liabilities
See Note 17 - Leases of the notes to consolidated financial statements for additional information.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - FAIR VALUE MEASUREMENTS
For disclosure purposes, we utilize a fair value hierarchy to categorize qualifying assets and liabilities into three broad levels based on the priority of the inputs used to determine their fair values. The hierarchy, which gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs, is comprised of the following three levels:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs, other than Level 1 inputs, that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 – Unobservable inputs that reflect the reporting entity’s own assumptions.
Recurring Fair Value Measurements
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2020
|
Asset Category
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents (1)
|
$
|
902,867
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
902,867
|
|
Restricted cash (2)
|
695
|
|
|
—
|
|
|
—
|
|
|
695
|
|
Deferred compensation plan assets (3)
|
36,491
|
|
|
—
|
|
|
—
|
|
|
36,491
|
|
Total
|
$
|
940,053
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
940,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2019
|
Asset Category
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents (1)
|
$
|
358,818
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
358,818
|
|
Restricted cash (2)
|
1,102
|
|
|
—
|
|
|
—
|
|
|
1,102
|
|
Deferred compensation plan assets (3)
|
30,295
|
|
|
—
|
|
|
—
|
|
|
30,295
|
|
Total
|
$
|
390,215
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
390,215
|
|
_________________
(1)Cash and cash equivalents consist of deposit accounts and money market funds with original maturity dates of three months or less, which are Level 1 assets. At December 31, 2020 and 2019, we had $482.2 million and $164.0 million, respectively, in money market funds.
(2)Restricted cash is classified as “Prepaid expenses and other” in the Consolidated Balance Sheets. Restricted cash primarily represents cash held in account for use on customer contracts.
(3)Deferred compensation plan assets are classified as “Other assets” in the Consolidated Balance Sheets.
Nonrecurring Fair Value Measurements
We have recorded goodwill and identifiable intangible assets in connection with our business acquisitions. Such assets are measured at fair value at the time of acquisition based on valuation techniques that appropriately represent the methods which would be used by other market participants in determining fair value. Periodically, we engage an independent third-party valuation specialist to assist with the valuation process, including the selection of appropriate methodologies and the development of market-based assumptions.
In addition, goodwill and intangible assets are tested for impairment using similar valuation methodologies to determine the fair value of such assets. As of December 31, 2020, we had goodwill related to our United States industrial services segment of $107.5 million accounted for at fair value on a nonrecurring basis as a result of the non-cash goodwill impairment charge recorded during the year. Refer to Note 9 - Goodwill, Identifiable Intangible Assets, and Other Long-Lived Assets of the notes to consolidated financial statements for a description of the valuation techniques and inputs used in the fair value measurement.
The inputs used for these nonrecurring fair value measurements represent Level 3 inputs.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - FAIR VALUE MEASUREMENTS - (Continued)
Fair Value of Financial Instruments
We believe that the carrying values of our financial instruments, which include accounts receivable and other financing commitments, approximate their fair values due primarily to their short-term maturities and low risk of counterparty default. The carrying value of our debt associated with the 2020 Credit Agreement approximates its fair value due to the variable rate on such debt.
NOTE 12 - INCOME TAXES
For the years ended December 31, 2020, 2019, and 2018, our income tax provision was calculated based on income from continuing operations before income taxes as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
228,181
|
|
|
$
|
430,253
|
|
|
$
|
375,408
|
|
Foreign
|
24,145
|
|
|
20,636
|
|
|
19,620
|
|
|
$
|
252,326
|
|
|
$
|
450,889
|
|
|
$
|
395,028
|
|
The income tax provision for the years ended December 31, 2020, 2019, and 2018 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current provision:
|
|
|
|
|
|
Federal
|
$
|
115,633
|
|
|
$
|
89,264
|
|
|
$
|
75,405
|
|
State and local
|
36,182
|
|
|
31,099
|
|
|
28,063
|
|
Foreign
|
3,922
|
|
|
3,685
|
|
|
1,389
|
|
|
155,737
|
|
|
124,048
|
|
|
104,857
|
|
Deferred (benefit) provision
|
(36,354)
|
|
|
1,701
|
|
|
4,249
|
|
|
$
|
119,383
|
|
|
$
|
125,749
|
|
|
$
|
109,106
|
|
For the year ended December 31, 2020, our income tax provision from continuing operations was $119.4 million compared to $125.7 million for the year ended December 31, 2019 and $109.1 million for the year ended December 31, 2018. The decrease in the income tax provision for 2020, when compared to 2019, was primarily driven by reduced state income taxes, inclusive of a deferred state benefit, resulting from a change in the mix of earnings. The increase in the income tax provision for 2019, when compared to 2018, was largely due to increased income from continuing operations before income taxes.
The income tax rates on income from continuing operations before income taxes for the years ended December 31, 2020, 2019, and 2018, were 47.3%, 27.9%, and 27.6%, respectively. The increase in the 2020 income tax rate, when compared to 2019, was predominantly due to the tax-effect of the $232.8 million of non-cash goodwill, identifiable intangible asset, and other long-lived asset impairment charges recorded during the second quarter, the majority of which is non-deductible for tax purposes. The slight increase in the 2019 income tax rate, when compared to 2018, was primarily due to: (a) an increase in our state deferred tax rate, partially as a result of a change in the mix of income during 2019, and (b) the continued impact of the Tax Cuts and Jobs Act, including the application of guidance regarding certain permanent differences and other nondeductible expenses.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES - (Continued)
Items accounting for the differences between income taxes computed at the federal statutory rate and the income tax provision for the years ended December 31, 2020, 2019, and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Federal income taxes at the statutory rate
|
$
|
52,989
|
|
|
$
|
94,687
|
|
|
$
|
82,946
|
|
State and local income taxes, net of federal tax benefits
|
19,290
|
|
|
24,904
|
|
|
21,827
|
|
Permanent differences
|
5,860
|
|
|
7,149
|
|
|
6,584
|
|
Excess tax benefit from share-based compensation
|
(142)
|
|
|
(733)
|
|
|
(1,227)
|
|
Non-deductible impairment charges
|
40,165
|
|
|
—
|
|
|
—
|
|
Foreign income taxes (including UK statutory rate changes)
|
(140)
|
|
|
(170)
|
|
|
70
|
|
Other
|
1,361
|
|
|
(88)
|
|
|
(1,094)
|
|
|
$
|
119,383
|
|
|
$
|
125,749
|
|
|
$
|
109,106
|
|
The minimum tax on global intangible low-taxed income for certain earnings of our foreign subsidiaries was approximately $0.1 million for each of the years ended December 31, 2020 and 2019 and approximately $0.6 million for the year ended December 31, 2018. The Company recognizes such tax as an expense in the period incurred.
As of December 31, 2020, we had undistributed foreign earnings from certain foreign subsidiaries of approximately $89.6 million. Based on our evaluation, and given that a significant portion of such earnings were subject to tax in prior periods, or are indefinitely reinvested, we have concluded that any taxes associated with the repatriation of such foreign earnings would be immaterial. As of December 31, 2020, the amount of cash held by these foreign subsidiaries was approximately $100.8 million which, if repatriated, should not result in any federal or state income taxes.
We file a consolidated federal income tax return including all of our U.S. subsidiaries with the Internal Revenue Service. We additionally file income tax returns with various state, local, and foreign tax agencies. Our income tax returns are subject to audit by various taxing authorities and are currently under examination for the years 2014 through 2019.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides for various tax relief and tax incentive measures, which did not have a material impact on our results of operations. Certain provisions of the CARES Act, however, did favorably impact our liquidity throughout 2020 as they allowed for the deferral of the employer’s portion of current year Social Security tax payments until 2021 and 2022.
On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law. This act provides for tax relief, as well as an omnibus appropriations package that extends various expiring tax provisions and allows for a 100% tax deduction for the cost of business meals in 2021 and 2022. The Consolidated Appropriations Act is not expected to have a material impact on the Company's income tax provision.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INCOME TAXES - (Continued)
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and income tax bases of assets and liabilities. The deferred income tax assets and deferred income tax liabilities recorded as of December 31, 2020 and 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred income tax assets:
|
|
|
|
Excess of amounts expensed for financial statement purposes over amounts deducted for income tax purposes:
|
|
|
|
Insurance liabilities
|
$
|
47,602
|
|
|
$
|
47,022
|
|
Pension liability
|
6,789
|
|
|
2,733
|
|
Operating lease liabilities
|
68,652
|
|
|
68,158
|
|
Deferred compensation
|
36,790
|
|
|
32,685
|
|
Accrued federal payroll taxes (1)
|
27,428
|
|
|
—
|
|
Other (including liabilities and reserves)
|
29,816
|
|
|
25,647
|
|
Total deferred income tax assets
|
217,077
|
|
|
176,245
|
|
Valuation allowance for deferred tax assets
|
(3,856)
|
|
|
(3,463)
|
|
Net deferred income tax assets
|
213,221
|
|
|
172,782
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
Costs capitalized for financial statement purposes and deducted for income tax purposes:
|
|
|
|
Goodwill and identifiable intangible assets
|
(146,821)
|
|
|
(156,604)
|
|
Operating lease right-of-use assets
|
(64,434)
|
|
|
(65,090)
|
|
Depreciation of property, plant and equipment
|
(23,958)
|
|
|
(18,622)
|
|
Other
|
(7,444)
|
|
|
(4,212)
|
|
Total deferred income tax liabilities
|
(242,657)
|
|
|
(244,528)
|
|
|
|
|
|
Net deferred income tax liabilities
|
$
|
(29,436)
|
|
|
$
|
(71,746)
|
|
_________________
(1)Represents employer Social Security tax payments deferred under the CARES Act.
The components of the net deferred income tax liabilities in the accompanying Consolidated Balance Sheets are included in “Other assets” in the amount of $7.4 million and $3.4 million and “Other long-term obligations” in the amount of $36.8 million and $75.2 million, at December 31, 2020 and 2019, respectively.
Valuation allowances are established when necessary to reduce deferred income tax assets when it is more likely than not that a tax benefit will not be realized. As of December 31, 2020 and 2019, the total valuation allowance on deferred income tax assets was approximately $3.9 million and $3.5 million, respectively, related to state and local net operating losses. Realization of our deferred income tax assets is dependent on our generating sufficient taxable income in the jurisdictions in which such deferred tax assets will reverse. Although realization is not assured, based on current projections of future taxable income, we believe it is more likely than not that the deferred income tax assets, net of the valuation allowance discussed above, will be realized. The amount of the deferred income tax assets considered realizable, however, could be reduced if estimates of future income are reduced.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMON STOCK
As of December 31, 2020 and 2019, there were 54,755,900 and 56,219,831 shares of our common stock outstanding, respectively.
We have paid quarterly dividends since October 25, 2011. We paid a regular quarterly dividend of $0.08 per share throughout 2020. In December 2020, our Board of Directors announced its intention to increase the regular quarterly dividend to $0.13 per share commencing with the dividend to be paid in the first quarter of 2021.
In September 2011, our Board of Directors (the “Board”) authorized a share repurchase program allowing us to begin repurchasing shares of our outstanding common stock. Subsequently, the Board has from time to time increased the amount of our common stock that we may repurchase under such program. Since the inception of the repurchase program, the Board has authorized us to repurchase up to $1.15 billion of our outstanding common stock. During the year ended December 31, 2020, we repurchased approximately 1.7 million shares of our common stock for approximately $112.6 million. Since the inception of the repurchase program through December 31, 2020, we have repurchased approximately 17.5 million shares of our common stock for approximately $904.0 million. As of December 31, 2020, there remained authorization for us to repurchase approximately $246.0 million of our shares. The repurchase program has no expiration date, does not obligate the Company to acquire any particular amount of common stock, and may be suspended, recommenced, or discontinued at any time or from time to time without prior notice. We may repurchase our shares from time to time to the extent permitted by securities laws and other legal requirements, including provisions in our 2020 Credit Agreement placing limitations on such repurchases. The repurchase program has been and will be funded from our operations.
NOTE 14 - SHARE-BASED COMPENSATION PLANS
We have an incentive plan under which stock awards, stock units, and other share-based compensation may be granted to officers, non-employee directors and key employees of the Company. During 2020, we amended and restated our incentive plan, eliminating the ability to grant new stock options, until such time, if any, as the plan is subsequently amended to provide for the ability to make such grants. Under the terms of this plan, 3,250,000 shares were authorized, and 1,023,299 shares are available for grant or issuance as of December 31, 2020. Any issuances under this plan are valued at the fair market value of our common stock on the grant date. The vesting schedule of any stock awards or stock units is determined by the Compensation and Personnel Committee of our Board of Directors at the time of the grant. Forfeitures are recognized as they occur.
The following table summarizes activity regarding our stock options and awards of shares and stock units since December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Restricted Stock Units
|
|
|
Shares
|
|
Weighted
Average
Price
|
|
|
|
Shares
|
|
Weighted
Average
Price
|
Balance, December 31, 2017
|
|
93,000
|
|
|
$
|
24.48
|
|
|
Balance, December 31, 2017
|
|
508,872
|
|
|
$
|
54.13
|
|
Granted
|
|
—
|
|
|
—
|
|
|
Granted
|
|
135,259
|
|
|
$
|
80.37
|
|
Expired
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
(1,250)
|
|
|
$
|
71.27
|
|
Exercised
|
|
(53,000)
|
|
|
$
|
24.48
|
|
|
Vested
|
|
(166,295)
|
|
|
$
|
48.44
|
|
Balance, December 31, 2018
|
|
40,000
|
|
|
$
|
24.48
|
|
|
Balance, December 31, 2018
|
|
476,586
|
|
|
$
|
63.52
|
|
Granted
|
|
—
|
|
|
—
|
|
|
Granted
|
|
169,766
|
|
|
$
|
64.34
|
|
Expired
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
(2,545)
|
|
|
$
|
71.88
|
|
Exercised
|
|
(20,000)
|
|
|
$
|
24.48
|
|
|
Vested
|
|
(226,229)
|
|
|
$
|
51.64
|
|
Balance, December 31, 2019
|
|
20,000
|
|
|
$
|
24.48
|
|
|
Balance, December 31, 2019
|
|
417,578
|
|
|
$
|
70.24
|
|
Granted
|
|
—
|
|
|
—
|
|
|
Granted
|
|
137,771
|
|
|
$
|
81.56
|
|
Expired
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
(984)
|
|
|
$
|
79.17
|
|
Exercised
|
|
(20,000)
|
|
|
$
|
24.48
|
|
|
Vested
|
|
(156,447)
|
|
|
$
|
72.72
|
|
Balance, December 31, 2020
|
|
—
|
|
|
—
|
|
|
Balance, December 31, 2020
|
|
397,918
|
|
|
$
|
73.16
|
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SHARE-BASED COMPENSATION PLANS - (Continued)
We recognized approximately $11.2 million, $11.4 million, and $11.0 million of compensation expense for stock units awarded to non-employee directors and employees pursuant to incentive plans for the years ended December 31, 2020, 2019, and 2018, respectively. We have approximately $8.6 million of compensation expense, net of income taxes, which will be recognized over the remaining vesting periods of up to 3 years. In addition, an aggregate of 63,907 restricted stock units granted to current or former non-employee directors vested as of December 31, 2020, but issuance has been deferred up to 5 years.
The income tax benefit derived in 2020, 2019, and 2018 as a result of stock option exercises and other share-based compensation was approximately $1.9 million, $2.6 million, and $3.6 million, respectively, of which approximately $0.2 million, $1.0 million, and $1.6 million, respectively, represented excess tax benefits.
The total intrinsic value (the amounts by which the stock price exceeded the exercise price on the date of exercise) of options that were exercised during both 2020 and 2019 was approximately $1.2 million, and the total intrinsic value of options that were exercised during 2018 was approximately $2.7 million. There were no options outstanding at December 31, 2020, however, the aggregate intrinsic value of options outstanding and exercisable as of December 31, 2019 and 2018 was approximately $1.2 million and $1.4 million, respectively.
We have an employee stock purchase plan. Under the terms of this plan, the maximum number of shares of our common stock that may be purchased is 3,000,000 shares. Generally, our corporate employees and non-union employees of our United States subsidiaries are eligible to participate in this plan. Employees covered by collective bargaining agreements generally are not eligible to participate in this plan.
NOTE 15 - RETIREMENT PLANS
Defined Benefit Plans
The funded status of our defined benefit plans, which represents the difference between the fair value of plan assets and the projected benefit obligations, is recognized in our balance sheet with a corresponding adjustment to accumulated other comprehensive income (loss). Gains and losses for the differences between actuarial assumptions and actual results, and unrecognized service costs, are recognized through accumulated other comprehensive income (loss). These amounts will be subsequently recognized as net periodic pension cost.
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 UK Plan. On May 31, 2010, we curtailed the future accrual of benefits for active employees under this plan.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RETIREMENT PLANS - (Continued)
The change in benefit obligations and assets of the UK Plan for the years ended December 31, 2020 and 2019 consisted of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Change in pension benefit obligation
|
|
|
|
Benefit obligation at beginning of year
|
$
|
322,766
|
|
|
$
|
281,776
|
|
Interest cost
|
6,401
|
|
|
7,961
|
|
Actuarial loss
|
50,863
|
|
|
32,866
|
|
Benefits paid
|
(10,029)
|
|
|
(12,059)
|
|
Foreign currency exchange rate changes
|
13,141
|
|
|
12,222
|
|
Benefit obligation at end of year
|
383,142
|
|
|
322,766
|
|
Change in pension plan assets
|
|
|
|
Fair value of plan assets at beginning of year
|
307,001
|
|
|
264,194
|
|
Actual return on plan assets
|
34,380
|
|
|
38,808
|
|
Employer contributions
|
4,665
|
|
|
4,428
|
|
Benefits paid
|
(10,029)
|
|
|
(12,059)
|
|
Foreign currency exchange rate changes
|
11,394
|
|
|
11,630
|
|
Fair value of plan assets at end of year
|
347,411
|
|
|
307,001
|
|
Funded status at end of year
|
$
|
(35,731)
|
|
|
$
|
(15,765)
|
|
Amounts not yet reflected in net periodic pension cost and included in accumulated other comprehensive loss were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Unrecognized losses
|
$
|
125,020
|
|
|
$
|
94,211
|
|
The underfunded status of the UK Plan of $35.7 million and $15.8 million at December 31, 2020 and 2019, respectively, is included in “Other long-term obligations” in the accompanying Consolidated Balance Sheets. No plan assets are expected to be returned to us during the year ending December 31, 2021.
The weighted average assumptions used to determine benefit obligations as of December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Discount rate
|
1.4
|
%
|
|
2.1
|
%
|
The weighted average assumptions used to determine net periodic pension cost for the years ended December 31, 2020, 2019, and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Discount rate
|
2.1
|
%
|
|
2.9
|
%
|
|
2.5
|
%
|
Annual rate of return on plan assets
|
4.3
|
%
|
|
4.9
|
%
|
|
5.0
|
%
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RETIREMENT PLANS - (Continued)
The annual rate of return on plan assets has been determined by modeling possible returns using the actuary’s portfolio return calculator and the fair value of plan assets. This models the long term expected returns of the various asset classes held in the portfolio and takes into account the additional benefits of holding a diversified portfolio. For measurement purposes of the liability, the annual rates of inflation of covered pension benefits assumed for 2020 and 2019 were 2.5% and 2.0%, respectively.
The components of net periodic pension cost (income) of the UK Plan for the years ended December 31, 2020, 2019, and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Interest cost
|
$
|
6,401
|
|
|
$
|
7,961
|
|
|
$
|
8,085
|
|
Expected return on plan assets
|
(12,023)
|
|
|
(12,165)
|
|
|
(13,797)
|
|
Amortization of unrecognized loss
|
2,389
|
|
|
2,342
|
|
|
2,630
|
|
Net periodic pension cost (income)
|
$
|
(3,233)
|
|
|
$
|
(1,862)
|
|
|
$
|
(3,082)
|
|
Actuarial gains and losses are amortized using a corridor approach whereby cumulative gains and losses in excess of the greater of 10% of the pension benefit obligation or the fair value of plan assets are amortized over the average life expectancy of plan participants. The amortization period for 2020 was 24 years.
The reclassification adjustment, net of income taxes, for the UK Plan from accumulated other comprehensive loss into net periodic pension cost was approximately $1.9 million for the years ended December 31, 2020 and 2019, and approximately $2.1 million for the year ended December 31, 2018. The estimated unrecognized loss for the UK Plan that will be amortized from accumulated other comprehensive loss into net periodic pension cost over the next year is approximately $2.9 million, net of income taxes.
UK Plan Assets
The investment policies and strategies for the assets of the UK Plan are established by its trustees (who are independent of the Company) to achieve a reasonable balance between risk, likely return, and administration expense, as well as to maintain funds at a level to meet minimum funding requirements. In order to ensure that an appropriate investment strategy is in place, an analysis of the UK Plan’s assets and liabilities is completed periodically. Target allocation percentages vary over time depending on the perceived risk and return potential of various asset classes and market conditions. The weighted average asset allocations and weighted average target allocations at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Target
Asset
Allocation
|
|
December 31,
2020
|
|
December 31,
2019
|
Debt
|
65.0
|
%
|
|
63.0
|
%
|
|
70.6
|
%
|
Equity
|
15.0
|
%
|
|
12.7
|
%
|
|
10.5
|
%
|
Cash
|
10.0
|
%
|
|
17.1
|
%
|
|
10.5
|
%
|
Real estate
|
10.0
|
%
|
|
7.2
|
%
|
|
8.4
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Plan assets of our UK Plan are invested through third-party fund managers in various investments with underlying holdings which consist of: (a) debt securities, which include United Kingdom government debt and United States, United Kingdom, European and emerging market corporate debt, (b) equity securities, which include marketable equity and equity like instruments across developed global equity markets, and (c) real estate assets, which represent trusts which invest directly or indirectly in various properties throughout the United Kingdom.
Assets of the UK Plan are allocated within the fair value hierarchy discussed in Note 11 - Fair Value Measurements, based on the nature of the investment. Level 1 assets represent cash. Level 2 assets consist of corporate debt funds, government bond funds, and equity funds whose underlying investments are valued using observable marketplace inputs. The fair value of the Level 2 assets are generally determined under a market approach using valuation models that incorporate observable inputs such as interest rates, bond yields, and quoted prices.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RETIREMENT PLANS - (Continued)
Investments valued using net asset value (“NAV”) as a practical expedient are excluded from the fair value hierarchy. These investments include: (a) funds which invest predominantly in senior secured debt instruments, targeting diversity across regions and sectors, as well as funds which invest in diversified credit vehicles that seek higher returns than traditional fixed income, primarily through investments in U.S. corporate debt, global credit, and structured debt, and (b) funds which aim to provide long-term income through investment in UK property assets. These investments are redeemable at NAV on a monthly or quarterly basis and have redemption notice periods of up to 90 days. In addition, certain of these investments are subject to a lockup period of up to 24 months.
The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes the valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following tables set forth the fair value of assets of the UK Plan as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2020
|
Asset Category
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Corporate debt funds
|
$
|
—
|
|
|
$
|
65,486
|
|
|
$
|
—
|
|
|
$
|
65,486
|
|
Government bond funds
|
—
|
|
|
57,133
|
|
|
—
|
|
|
57,133
|
|
Equity funds
|
—
|
|
|
44,132
|
|
|
—
|
|
|
44,132
|
|
Cash
|
59,246
|
|
|
—
|
|
|
—
|
|
|
59,246
|
|
Total plan assets in fair value hierarchy
|
$
|
59,246
|
|
|
$
|
166,751
|
|
|
$
|
—
|
|
|
225,997
|
|
Plan assets measured using NAV as a practical expedient: (1)
|
|
|
|
|
|
|
|
Debt funds
|
|
|
|
|
|
|
96,196
|
|
Real estate funds
|
|
|
|
|
|
|
25,218
|
|
Total plan assets at fair value
|
|
|
|
|
|
|
$
|
347,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2019
|
Asset Category
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Corporate debt funds
|
$
|
—
|
|
|
$
|
64,314
|
|
|
$
|
—
|
|
|
$
|
64,314
|
|
Government bond funds
|
—
|
|
|
49,164
|
|
|
—
|
|
|
49,164
|
|
Equity funds
|
—
|
|
|
32,356
|
|
|
—
|
|
|
32,356
|
|
Cash
|
32,240
|
|
|
—
|
|
|
—
|
|
|
32,240
|
|
Total plan assets in fair value hierarchy
|
$
|
32,240
|
|
|
$
|
145,834
|
|
|
$
|
—
|
|
|
178,074
|
|
Plan assets measured using NAV as a practical expedient: (1)
|
|
|
|
|
|
|
|
Debt funds
|
|
|
|
|
|
|
103,188
|
|
Real estate funds
|
|
|
|
|
|
|
25,739
|
|
Total plan assets at fair value
|
|
|
|
|
|
|
$
|
307,001
|
|
_________________
(1)Certain investments measured using NAV as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the total fair value of plan assets.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RETIREMENT PLANS - (Continued)
Cash Flows:
Contributions
Our United Kingdom subsidiary expects to contribute approximately $5.0 million to the UK Plan in 2021.
Estimated Future Benefit Payments
The following estimated benefit payments are expected to be paid in the following years (in thousands):
|
|
|
|
|
|
|
Pension
Benefit Payments
|
2021
|
$
|
11,036
|
|
2022
|
$
|
11,356
|
|
2023
|
$
|
11,684
|
|
2024
|
$
|
12,021
|
|
2025
|
$
|
12,370
|
|
Succeeding five years
|
$
|
67,423
|
|
The following table shows certain information for the UK Plan where the accumulated benefit obligation is in excess of plan assets as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Projected benefit obligation
|
$
|
383,142
|
|
|
$
|
322,766
|
|
Accumulated benefit obligation
|
$
|
383,142
|
|
|
$
|
322,766
|
|
Fair value of plan assets
|
$
|
347,411
|
|
|
$
|
307,001
|
|
We also sponsor three domestic retirement plans in which participation by new individuals is frozen. The benefit obligation associated with these plans as of December 31, 2020 and 2019 was approximately $9.2 million. The estimated fair value of the plan assets as of December 31, 2020 and 2019 was approximately $6.0 million and $5.7 million, respectively. The plan assets are considered Level 1 assets within the fair value hierarchy and are predominantly invested in cash, equities, and equity and bond funds. The liability balances as of December 31, 2020 and 2019 are classified as “Other long-term obligations” in the accompanying Consolidated Balance Sheets. The measurement date for these plans is December 31 of each year. The major assumptions used in the actuarial valuations to determine benefit obligations as of December 31, 2020 and 2019 included discount rates of 2.00% to 2.25% for 2020 and 3.00% to 4.00% for 2019. Also, included was an expected rate of return of 7.00% for both 2020 and 2019. The net periodic pension cost associated with the domestic plans was approximately $0.3 million for each of the years ended December 31, 2020, 2019, and 2018. The reclassification adjustment, net of income taxes, from accumulated other comprehensive loss into net periodic pension cost was approximately $0.3 million for the year ended December 31, 2020, and approximately $0.2 million for each of the years ended December 31, 2019, and 2018. The estimated loss for these plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost over the next year is approximately $0.2 million, net of income taxes. The future estimated benefit payments expected to be paid from the plans for the next ten years is approximately $0.5 million per year.
Multiemployer Plans
We participate in approximately 200 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in an MEPP, we are potentially liable with the other participating employers for such plan's underfunding either through an increase in our required contributions or, in the case of our withdrawal from the plan, a payment based upon our proportionate share of the plan's unfunded benefits, in each case, as described below. Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of an MEPP and legal requirements of the Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact the funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions, and the utilization of extended amortization provisions.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RETIREMENT PLANS - (Continued)
An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to: (a) an increase in our contribution rate as a signatory to the applicable CBA, (b) a reallocation of the contributions already being made by participating employers for various benefits to individuals participating in the MEPP, and/or (c) a reduction in the benefits to be paid to future and/or current retirees. In addition, the PPA requires that a 5% surcharge be levied on employer contributions for the first year commencing after the date the employer receives notice that the MEPP is in critical status and a 10% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP.
We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce our number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, as well as the absence of specific information regarding the MEPP’s current financial situation, we are unable to determine (a) the amount and timing of a future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial position, results of operations or liquidity. We did not record any withdrawal liability for the years ended December 31, 2020, 2019, and 2018.
The following table lists all domestic MEPPs to which our contributions exceeded $2.0 million in 2020. Additionally, this table also lists all domestic MEPPs to which we contributed in 2020 in excess of $0.5 million for MEPPs in the critical status, “red zone,” and $1.0 million for MEPPs in the endangered status, “orange or yellow zones,” as defined by the PPA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
|
EIN/Pension Plan Number
|
|
PPA Zone Status (1)
|
|
FIP/RP
Status
|
|
Contributions
|
|
Contributions greater than 5% of total plan contributions (2)
|
|
Expiration
date or range of expiration dates of CBA(s)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
2018
|
|
National Automatic Sprinkler Industry Pension Fund
|
|
52-6054620
|
001
|
|
Red
|
|
Red
|
|
Implemented
|
|
$
|
17,504
|
|
|
$
|
15,924
|
|
|
$
|
14,888
|
|
|
No
|
|
March 2021 to
June 2023
|
Plumbers & Pipefitters National Pension Fund
|
|
52-6152779
|
001
|
|
Yellow
|
|
Yellow
|
|
Implemented
|
|
14,095
|
|
|
13,821
|
|
|
11,868
|
|
|
No
|
|
February 2021 to
August 2026
|
Sheet Metal Workers National Pension Fund
|
|
52-6112463
|
001
|
|
Yellow
|
|
Yellow
|
|
Implemented
|
|
11,621
|
|
|
11,713
|
|
|
10,895
|
|
|
No
|
|
April 2021 to
June 2024
|
National Electrical Benefit Fund
|
|
53-0181657
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
11,573
|
|
|
16,901
|
|
|
10,700
|
|
|
No
|
|
February 2021 to
September 2024
|
Pension, Hospitalization & Benefit Plan of the Electrical Industry-Pension Trust Account
|
|
13-6123601
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
11,264
|
|
|
10,075
|
|
|
10,469
|
|
|
No
|
|
January 2021 to April 2022
|
Electrical Workers Local No. 26 Pension Trust Fund
|
|
52-6117919
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
7,086
|
|
|
8,434
|
|
|
5,485
|
|
|
Yes
|
|
May 2021 to October 2023
|
Sheet Metal Workers Pension Plan of Northern California
|
|
51-6115939
|
001
|
|
Red
|
|
Red
|
|
Implemented
|
|
6,605
|
|
|
6,233
|
|
|
5,488
|
|
|
No
|
|
June 2021 to June 2026
|
Central Pension Fund of the IUOE & Participating Employers
|
|
36-6052390
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
6,115
|
|
|
6,253
|
|
|
6,384
|
|
|
No
|
|
February 2021 to
December 2023
|
Southern California IBEW-NECA Pension Trust Fund
|
|
95-6392774
|
001
|
|
Yellow
|
|
Yellow
|
|
Implemented
|
|
5,719
|
|
|
6,277
|
|
|
5,754
|
|
|
No
|
|
May 2021 to
November 2023
|
Plumbers Pipefitters & Mechanical Equipment Service Local Union 392 Pension Plan
|
|
31-0655223
|
001
|
|
Red
|
|
Red
|
|
Implemented
|
|
5,667
|
|
|
6,412
|
|
|
6,047
|
|
|
Yes
|
|
June 2022
|
San Diego Electrical Pension Plan
|
|
95-6101801
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
4,383
|
|
|
3,843
|
|
|
3,008
|
|
|
Yes
|
|
May 2021 to May 2022
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15 - RETIREMENT PLANS - (Continued)
|
Pension Fund
|
|
EIN/Pension Plan Number
|
|
PPA Zone Status (1)
|
|
FIP/RP
Status
|
|
Contributions
|
|
Contributions greater than 5% of total plan contributions (2)
|
|
Expiration
date or range of expiration dates of CBA(s)
|
|
2020
|
|
2019
|
|
|
2020
|
|
2019
|
|
2018
|
|
Pipefitters Union Local 537 Pension Fund
|
|
51-6030859
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
4,275
|
|
|
4,754
|
|
|
6,038
|
|
|
Yes
|
|
February 2021 to September 2021
|
Arizona Pipe Trades Pension Trust Fund
|
|
86-6025734
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
4,142
|
|
|
6,071
|
|
|
2,640
|
|
|
Yes
|
|
June 2021
|
Southern California Pipe Trades Retirement Fund
|
|
51-6108443
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
4,043
|
|
|
3,274
|
|
|
3,095
|
|
|
No
|
|
June 2021 to June 2026
|
Edison Pension Plan
|
|
93-6061681
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
3,864
|
|
|
5,361
|
|
|
3,140
|
|
|
Yes
|
|
December 2021
|
Heating, Piping & Refrigeration Pension Fund
|
|
52-1058013
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
3,349
|
|
|
4,185
|
|
|
2,619
|
|
|
No
|
|
July 2022
|
Eighth District Electrical Pension Fund
|
|
84-6100393
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
3,242
|
|
|
3,590
|
|
|
3,486
|
|
|
Yes
|
|
February 2021 to May 2023
|
U.A. Local 393 Pension Trust Fund Defined Benefit
|
|
94-6359772
|
002
|
|
Green
|
|
Green
|
|
NA
|
|
3,168
|
|
|
3,858
|
|
|
4,298
|
|
|
Yes
|
|
June 2021 to July 2021
|
Electrical Contractors Association of the City of Chicago Local Union 134, IBEW Joint Pension Trust of Chicago Pension Plan 2
|
|
51-6030753
|
002
|
|
Green
|
|
Green
|
|
NA
|
|
3,004
|
|
|
3,204
|
|
|
4,308
|
|
|
No
|
|
June 2021
|
U.A. Local 38 Defined Benefit Pension Plan
|
|
94-1285319
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
2,874
|
|
|
2,030
|
|
|
1,551
|
|
|
No
|
|
June 2021 to June 2023
|
Sheet Metal Workers Pension Plan of Southern California, Arizona & Nevada
|
|
95-6052257
|
001
|
|
Yellow
|
|
Yellow
|
|
Implemented
|
|
2,706
|
|
|
2,423
|
|
|
1,934
|
|
|
No
|
|
June 2021 to June 2026
|
Northern California Pipe Trades Pension Plan
|
|
94-3190386
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
2,463
|
|
|
3,077
|
|
|
3,104
|
|
|
No
|
|
June 2021
|
U.A. Plumbers Local 24 Pension Fund
|
|
22-6042823
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
2,460
|
|
|
2,460
|
|
|
3,461
|
|
|
Yes
|
|
April 2021
|
NECA-IBEW Pension Trust Fund
|
|
51-6029903
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
2,369
|
|
|
2,528
|
|
|
2,650
|
|
|
Yes
|
|
May 2021 to December 2021
|
Northern California Electrical Workers Pension Plan
|
|
94-6062674
|
001
|
|
Green
|
|
Green
|
|
NA
|
|
2,263
|
|
|
965
|
|
|
1,075
|
|
|
No
|
|
May 2021 to May 2022
|
Plumbing & Pipe Fitting Local 219 Pension Fund
|
|
34-6682376
|
001
|
|
Red
|
|
Red
|
|
Implemented
|
|
1,680
|
|
|
1,937
|
|
|
2,197
|
|
|
Yes
|
|
May 2023
|
Boilermaker-Blacksmith National Pension Trust
|
|
48-6168020
|
001
|
|
Yellow
|
|
Red
|
|
Implemented
|
|
1,574
|
|
|
1,681
|
|
|
1,446
|
|
|
No
|
|
September 2021 to
September 2023
|
Plumbers & Pipefitters Local Union No. 502 & 633 Pension Fund
|
|
61-6078145
|
001
|
|
Yellow
|
|
Yellow
|
|
Implemented
|
|
1,271
|
|
|
1,596
|
|
|
1,167
|
|
|
No
|
|
May 2021 to July 2022
|
I.B.E.W. Local 701 Pension Fund
|
|
36-6455509
|
001
|
|
Yellow
|
|
Yellow
|
|
Implemented
|
|
1,197
|
|
|
915
|
|
|
588
|
|
|
No
|
|
May 2021 to December 2021
|
Steamfitters Local Union No. 420 Pension Plan
|
|
23-2004424
|
001
|
|
Red
|
|
Red
|
|
Implemented
|
|
553
|
|
|
641
|
|
|
706
|
|
|
No
|
|
May 2023
|
Other Multiemployer Pension Plans
|
|
|
|
|
|
|
|
|
|
|
51,953
|
|
|
55,042
|
|
|
49,740
|
|
|
|
|
Various
|
Total Contributions
|
|
|
|
|
|
|
|
|
|
|
$
|
204,082
|
|
|
$
|
215,478
|
|
|
$
|
190,229
|
|
|
|
|
|
_________________
(1) The zone status represents the most recent available information for the respective MEPP, which may be 2019 or earlier for the 2020 year and 2018 or earlier for the 2019 year. In general, plans with a “green” zone status have a funding ratio of at least 80%, plans with an “orange” or “yellow” zone status have a funding ratio of between 65% and less than 80%, and plans with a “red” zone status are less than 65% funded.
(2) This information was obtained from the respective plan’s Form 5500 (“Forms”) for the most current available filing. These dates may not correspond with our fiscal year contributions. The percentages of contributions are based upon disclosures contained in the plans’ Forms. Those Forms, among other things, disclose the names of individual participating employers whose annual contributions account for more than 5% of the aggregate annual amount contributed by all participating employers for a plan year. Accordingly, if the annual contribution of two or more of our subsidiaries each accounted for less than 5% of such contributions, but in the aggregate accounted for in excess of 5% of such contributions, that greater percentage is not available and accordingly is not disclosed.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RETIREMENT PLANS - (Continued)
The nature and diversity of our operations may result in volatility in the amount of our contributions to a particular MEPP for any given period. That is because, in any given market, a change in the mix, volume of, or size of our projects could result in a change in our direct labor force and a corresponding change in our contributions to the MEPP(s) dictated by the applicable CBA. Additionally, the amount of contributions to a particular MEPP could also be affected by the terms of the CBA, which could require at a particular time, an increase in the contribution rate and/or surcharges. Acquisitions made by us since 2018 have resulted in incremental contributions to various MEPPs of approximately $5.3 million.
Additionally, we contribute to certain multiemployer plans that provide post retirement benefits such as health and welfare benefits and/or defined contribution/annuity plans, among others. Our contributions to these plans were approximately $156.1 million, $153.5 million, and $135.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. Acquisitions made by use since 2018 have resulted in incremental contributions to other post retirement benefit plans of approximately $15.6 million. The amount of contributions to these plans is also subject for the most part to the factors discussed above in conjunction with the MEPPs.
Defined Contribution Plans
We have defined contribution retirement and savings plans that cover eligible employees in the United States. Contributions to these plans are based on a percentage of the employee’s base compensation. The expenses recognized for employer contributions to these plans were approximately $32.4 million for each of the years ended December 31, 2020 and 2019 and approximately $29.8 million for the year ended December 31, 2018. At our discretion and subject to applicable plan documents, we may make additional supplemental matching contributions to one of our defined contribution retirement and savings plans. The expenses recognized related to additional supplemental matching contributions for the years ended December 31, 2020, 2019, and 2018 were approximately $9.1 million, $6.8 million, and $6.1 million, respectively.
Our United Kingdom subsidiary also has defined contribution retirement plans. The expense recognized related to employer matching contributions for the years ended December 31, 2020, 2019, and 2018 was approximately $7.4 million, $6.1 million, and $4.9 million, respectively.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Contractual Guarantees
We have agreements with our executive officers and certain other key management personnel providing for severance benefits for such employees upon termination of their employment under certain circumstances.
In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees.
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. Surety Bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts. We have agreed to indemnify the Surety Companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. Public sector contracts require Surety Bonds more frequently than private sector contracts and, accordingly, our bonding requirements typically increase as the amount of our public sector work increases. As of December 31, 2020, based on the percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $1.3 billion, which represents approximately 29% of our total remaining performance obligations. In addition, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for certain of our employees, at the request of labor unions representing such employees, or as collateral for certain insurance obligations. As of December 31, 2020, we satisfied approximately $37.5 million of the collateral requirements of our insurance programs by utilizing Surety Bonds. We are not aware of any losses in connection with Surety Bonds that have been posted on our behalf, and we do not expect to incur significant losses in the foreseeable future.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - COMMITMENTS AND CONTINGENCIES - (Continued)
We are subject to regulation with respect to the handling of certain materials used in construction, which are classified as hazardous or toxic by federal, state, and local agencies. Our practice is to avoid participation in projects principally involving the remediation or removal of such materials. However, when remediation is required as part of our contract performance, we believe we comply with all applicable regulations governing the discharge of hazardous materials into the environment or otherwise relating to the protection of the environment.
At December 31, 2020, we employed approximately 33,000 people, approximately 59% of whom are represented by various unions pursuant to approximately 400 collective bargaining agreements between our individual subsidiaries and local unions. We believe that our employee relations are generally good. Only two of these collective bargaining agreements are national or regional in scope.
Restructuring expenses, related to employee severance obligations, were $2.2 million, $1.5 million, and $2.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. As of December 31, 2020, the balance of our restructuring related obligations yet to be paid was $2.7 million. The balance of such obligations as of December 31, 2019 and 2018 was $1.6 million. The majority of obligations outstanding as of December 31, 2019 and 2018 were paid during 2020 and 2019, respectively. The obligations outstanding as of December 31, 2020 will be paid pursuant to our contractual obligations through 2022. No material expenses in connection with restructuring are expected to be incurred during 2021.
The changes in restructuring activity by reportable segment during the years ended December 31, 2020 and 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
electrical
construction
and facilities
services segment
|
|
United States
mechanical
construction
and facilities
services segment
|
|
United States
building
services segment
|
|
Corporate administration
|
|
Total
|
Balance at December 31, 2018
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
176
|
|
|
$
|
1,424
|
|
|
$
|
1,630
|
|
Charges
|
445
|
|
|
—
|
|
|
1,078
|
|
|
—
|
|
|
1,523
|
|
Payments
|
(30)
|
|
|
—
|
|
|
(842)
|
|
|
(723)
|
|
|
(1,595)
|
|
Balance at December 31, 2019
|
445
|
|
|
—
|
|
|
412
|
|
|
701
|
|
|
1,558
|
|
Charges
|
1,072
|
|
|
1,073
|
|
|
69
|
|
|
—
|
|
|
2,214
|
|
Payments
|
(239)
|
|
|
—
|
|
|
(481)
|
|
|
(355)
|
|
|
(1,075)
|
|
Balance at December 31, 2020
|
$
|
1,278
|
|
|
$
|
1,073
|
|
|
$
|
—
|
|
|
$
|
346
|
|
|
$
|
2,697
|
|
Government Contracts
As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, which such audits may result in fines, penalties and compensatory and treble damages, and possible suspension or debarment from doing business with the government. Based on currently available information, we believe the outcome of ongoing government disputes and investigations will not have a material impact on our financial position, results of operations or liquidity.
Computer System Attack
On February 15, 2020, we became aware of an infiltration and encryption of portions of our information technology network. This attack temporarily disrupted our use of the impacted systems. As part of our investigation into this incident, we engaged outside security experts, who did not identify any exfiltration of customer or employee data or any inappropriate access to our accounting or finance systems. The Company maintains insurance coverage for these types of incidents; such policies, however, may not completely provide coverage for, or completely offset the costs of, this infiltration.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - COMMITMENTS AND CONTINGENCIES - (Continued)
Legal Proceedings
We are involved in several legal proceedings in which damages and claims have been asserted against us. We believe that we have a number of valid defenses to such proceedings and claims and intend to vigorously defend ourselves. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations, or liquidity. We record a loss contingency if the potential loss from a proceeding or claim is considered probable and the amount can be reasonably estimated or a range of loss can be determined. We provide disclosure when it is reasonably possible that a loss will be incurred in excess of any recorded provision. Significant judgment is required in these determinations. As additional information becomes available, we reassess prior determinations and may change our estimates. Additional claims may be asserted against us in the future. Litigation is subject to many uncertainties, and the outcome of litigation is not predictable with assurance. It is possible that a litigation matter for which liabilities have not been recorded could be decided unfavorably to us, and that any such unfavorable decision could have a material adverse effect on our financial position, results of operations or liquidity.
NOTE 17 - LEASES
We lease real estate, vehicles and equipment under various arrangements which are classified as either operating or finance leases. A lease exists when a contract or part of a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining whether a lease exists, we consider whether a contract provides us with both: (a) the right to obtain substantially all of the economic benefits from the use of the identified asset and (b) the right to direct the use of the identified asset.
Many of our leases include base rental periods coupled with options to renew or terminate the lease, generally at our discretion. Certain leases additionally include options to purchase the leased asset. In evaluating the lease term, we consider whether we are reasonably certain to exercise such options. To the extent a significant economic incentive exists to exercise an option, that option is included within the lease term. However, based on the nature of our lease arrangements, options generally do not provide us with a significant economic incentive and are therefore excluded from the lease term for the majority of our arrangements.
Our leases typically include a combination of fixed and variable payments. Fixed payments are generally included when measuring the right-of-use asset and lease liability. Variable payments, which primarily represent payments based on usage of the underlying asset, are generally excluded from such measurement and expensed as incurred. In addition, certain of our lease arrangements may contain a lease coupled with an arrangement to provide other services, such as maintenance, or may require us to make other payments on behalf of the lessor related to the leased asset, such as payments for taxes or insurance. We account for these non-lease components together with the associated lease component for each of our asset classes.
The measurement of right-of-use assets and lease liabilities requires us to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for the majority of our leases, the rate implicit in the lease is not known. In these instances, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis, over a similar term, an amount equal to the lease payments.
Our lease arrangements generally do not contain significant restrictions or covenants; however, certain of our vehicle and equipment leases include residual value guarantees, whereby we provide a guarantee to the lessor that the value of the underlying asset will be at least a specified amount at the end of the lease. Amounts probable of being owed under these guarantees are included within the measurement of the right-of-use asset and lease liability.
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - LEASES - (Continued)
Lease Position
The following table presents the lease-related assets and liabilities as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on the Consolidated Balance Sheet
|
|
|
December 31,
2020
|
|
December 31,
2019
|
Assets
|
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
|
$
|
242,155
|
|
|
$
|
245,471
|
|
Finance lease assets
|
|
Property, plant and equipment, net
|
|
|
9,638
|
|
|
9,609
|
|
Total lease assets
|
|
|
|
|
$
|
251,793
|
|
|
$
|
255,080
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease liabilities, current
|
|
|
$
|
53,632
|
|
|
$
|
53,144
|
|
Finance
|
|
Current maturities of long-term debt and finance lease liabilities
|
|
|
3,995
|
|
|
4,088
|
|
Noncurrent
|
|
|
|
|
|
|
|
Operating
|
|
Operating lease liabilities, long-term
|
|
|
205,362
|
|
|
204,950
|
|
Finance
|
|
Long-term debt and finance lease liabilities
|
|
|
5,971
|
|
|
5,591
|
|
Total lease liabilities
|
|
|
|
|
$
|
268,960
|
|
|
$
|
267,773
|
|
Lease Costs
The following table presents information related to lease expense for the years ended December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Finance lease expense:
|
|
|
|
|
Amortization expense
|
|
$
|
4,562
|
|
|
$
|
4,575
|
|
Interest expense
|
|
355
|
|
|
427
|
|
Operating lease expense
|
|
69,208
|
|
|
66,650
|
|
Short-term lease expense
|
|
139,706
|
|
|
149,528
|
|
Variable lease expense
|
|
5,441
|
|
|
4,924
|
|
Total lease expense
|
|
$
|
219,272
|
|
|
$
|
226,104
|
|
Rent expense for operating leases and other rental items, including short-term equipment rentals, for the year ended December 31, 2018 was approximately $191.8 million. For each of the years ended December 31, 2020, 2019, and 2018, sublease rental income was approximately $0.5 million.
Lease Term and Discount Rate
The following table presents certain information related to lease terms and discount rates for leases as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020
|
|
December 31,
2019
|
Weighted-average remaining lease term:
|
|
|
|
|
Operating leases
|
|
6.6 years
|
|
6.7 years
|
Finance leases
|
|
3.1 years
|
|
2.9 years
|
Weighted-average discount rate:
|
|
|
|
|
Operating leases
|
|
3.59
|
%
|
|
4.04
|
%
|
Finance leases
|
|
3.24
|
%
|
|
4.16
|
%
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - LEASES - (Continued)
Other Information
The following table presents supplemental cash flow information related to leases for the years ended December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows used for operating leases
|
|
$
|
65,016
|
|
|
$
|
65,757
|
|
Operating cash flows used for finance leases
|
|
$
|
355
|
|
|
$
|
427
|
|
Financing cash flows used for finance leases
|
|
$
|
4,470
|
|
|
$
|
4,571
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
55,895
|
|
|
$
|
84,089
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
4,558
|
|
|
$
|
5,311
|
|
For the year ended December 31, 2018, assets acquired under capital leases amounted to approximately $1.1 million.
Maturity of Lease Liabilities
The following table reconciles future minimum lease payments on an undiscounted cash flow basis to the lease liabilities reported in the Consolidated Balance Sheet as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2021
|
$
|
61,743
|
|
|
$
|
4,234
|
|
2022
|
50,452
|
|
|
2,902
|
|
2023
|
43,240
|
|
|
1,652
|
|
2024
|
33,185
|
|
|
1,289
|
|
2025
|
25,648
|
|
|
265
|
|
Thereafter
|
76,904
|
|
|
69
|
|
Total minimum lease payments
|
291,172
|
|
|
10,411
|
|
Less: Amount of lease payments representing interest
|
(32,178)
|
|
|
(445)
|
|
Present value of future minimum lease payments
|
$
|
258,994
|
|
|
$
|
9,966
|
|
|
|
|
|
Current portion of lease liabilities
|
$
|
53,632
|
|
|
$
|
3,995
|
|
Noncurrent portion of lease liabilities
|
205,362
|
|
|
5,971
|
|
Present value of future minimum lease payments
|
$
|
258,994
|
|
|
$
|
9,966
|
|
NOTE 18 - ADDITIONAL CASH FLOW INFORMATION
The following table presents information about cash paid for interest and income taxes for the years ended December 31, 2020, 2019, and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cash paid during the year for:
|
|
|
|
|
|
Interest
|
$
|
8,289
|
|
|
$
|
12,683
|
|
|
$
|
12,435
|
|
Income taxes
|
$
|
145,386
|
|
|
$
|
126,169
|
|
|
$
|
123,651
|
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SEGMENT INFORMATION
We have the following reportable segments: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; premises electrical and lighting systems; process instrumentation in the refining, chemical processing, food processing, and mining industries; low-voltage systems, such as fire alarm, security, and process control; voice and data communication, including fiber-optic and low-voltage cabling, distributed antenna systems, and audiovisual systems; roadway and transit lighting and signaling; 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; controls and filtration; water and wastewater treatment; central plant heating and cooling; cranes and rigging; millwrighting; and steel fabrication, erection and welding); (c) United States building services; (d) United States industrial services; and (e) United Kingdom building services. The “United States building services” and “United Kingdom building services” segments principally consist of those operations which provide a portfolio of services needed to support the operation and maintenance of customers’ facilities, including commercial and government site-based operations and maintenance; facility management, maintenance, and services; outage services to utilities and industrial plants; military base operations support services; mobile mechanical maintenance and services, including maintenance and service of mechanical, electrical, plumbing, and building automation systems; indoor air quality improvement services; floor care and janitorial services; landscaping, lot sweeping, and snow removal; other building services, including reception, security, and catering services; vendor management; call center services; installation and support for building systems; program development, management and maintenance for energy systems; technical consulting and diagnostic services; infrastructure and building projects for federal, state and local governmental agencies and bodies; and small modification and retrofit projects, which services are not generally related to customers’ construction programs. The “United States industrial services” segment principally consists of those operations which provide industrial maintenance and services for refineries, petrochemical plants, and other customers within the oil and gas industry. Services of this segment include refinery turnaround planning and engineering; specialty welding; overhaul and maintenance of critical process units; specialty technical services; on-site repairs, maintenance and service of heat exchangers, towers, vessels, and piping; and design, manufacturing, repair, and hydro blast cleaning of shell and tube heat exchangers and related equipment.
The following tables present financial information for each of our reportable segments for the years ended December 31, 2020, 2019, and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Revenues from unrelated entities:
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
1,973,427
|
|
|
$
|
2,216,600
|
|
|
$
|
1,954,323
|
|
United States mechanical construction and facilities services
|
3,485,495
|
|
|
3,340,337
|
|
|
2,962,843
|
|
United States building services
|
2,110,129
|
|
|
2,106,872
|
|
|
1,875,485
|
|
United States industrial services
|
797,447
|
|
|
1,087,543
|
|
|
923,109
|
|
Total United States operations
|
8,366,498
|
|
|
8,751,352
|
|
|
7,715,760
|
|
United Kingdom building services
|
430,563
|
|
|
423,259
|
|
|
414,871
|
|
Total operations
|
$
|
8,797,061
|
|
|
$
|
9,174,611
|
|
|
$
|
8,130,631
|
|
|
|
|
|
|
|
Total revenues:
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
1,979,899
|
|
|
$
|
2,220,582
|
|
|
$
|
1,959,978
|
|
United States mechanical construction and facilities services
|
3,502,131
|
|
|
3,370,960
|
|
|
2,998,918
|
|
United States building services
|
2,189,236
|
|
|
2,182,390
|
|
|
1,942,663
|
|
United States industrial services
|
812,844
|
|
|
1,111,264
|
|
|
930,724
|
|
Less intersegment revenues
|
(117,612)
|
|
|
(133,844)
|
|
|
(116,523)
|
|
Total United States operations
|
8,366,498
|
|
|
8,751,352
|
|
|
7,715,760
|
|
United Kingdom building services
|
430,563
|
|
|
423,259
|
|
|
414,871
|
|
Total operations
|
$
|
8,797,061
|
|
|
$
|
9,174,611
|
|
|
$
|
8,130,631
|
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SEGMENT INFORMATION - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Operating income (loss):
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
166,501
|
|
|
$
|
161,684
|
|
|
$
|
139,430
|
|
United States mechanical construction and facilities services
|
292,536
|
|
|
225,040
|
|
|
219,853
|
|
United States building services
|
113,431
|
|
|
114,754
|
|
|
93,827
|
|
United States industrial services
|
(2,788)
|
|
|
44,340
|
|
|
27,671
|
|
Total United States operations
|
569,680
|
|
|
545,818
|
|
|
480,781
|
|
United Kingdom building services
|
20,660
|
|
|
18,323
|
|
|
15,930
|
|
Corporate administration
|
(98,542)
|
|
|
(101,726)
|
|
|
(90,415)
|
|
Restructuring expenses
|
(2,214)
|
|
|
(1,523)
|
|
|
(2,306)
|
|
Impairment loss on goodwill, identifiable intangible assets,
and other long-lived assets
|
(232,750)
|
|
|
—
|
|
|
(907)
|
|
Total operations
|
256,834
|
|
|
460,892
|
|
|
403,083
|
|
Other corporate items:
|
|
|
|
|
|
Net periodic pension (cost) income
|
2,980
|
|
|
1,553
|
|
|
2,743
|
|
Interest expense
|
(9,009)
|
|
|
(13,821)
|
|
|
(13,544)
|
|
Interest income
|
1,521
|
|
|
2,265
|
|
|
2,746
|
|
Income from continuing operations before income taxes
|
$
|
252,326
|
|
|
$
|
450,889
|
|
|
$
|
395,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
9,569
|
|
|
$
|
5,876
|
|
|
$
|
5,993
|
|
United States mechanical construction and facilities services
|
11,239
|
|
|
7,890
|
|
|
7,504
|
|
United States building services
|
10,366
|
|
|
14,291
|
|
|
10,414
|
|
United States industrial services
|
8,706
|
|
|
15,802
|
|
|
18,386
|
|
Total United States operations
|
39,880
|
|
|
43,859
|
|
|
42,297
|
|
United Kingdom building services
|
3,693
|
|
|
3,598
|
|
|
870
|
|
Corporate administration
|
4,396
|
|
|
975
|
|
|
312
|
|
Total operations
|
$
|
47,969
|
|
|
$
|
48,432
|
|
|
$
|
43,479
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment:
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
7,463
|
|
|
$
|
7,550
|
|
|
$
|
6,221
|
|
United States mechanical construction and facilities services
|
10,683
|
|
|
8,764
|
|
|
7,803
|
|
United States building services
|
12,284
|
|
|
12,728
|
|
|
10,324
|
|
United States industrial services
|
11,676
|
|
|
11,154
|
|
|
9,943
|
|
Total United States operations
|
42,106
|
|
|
40,196
|
|
|
34,291
|
|
United Kingdom building services
|
3,046
|
|
|
2,942
|
|
|
3,447
|
|
Corporate administration
|
1,569
|
|
|
807
|
|
|
734
|
|
Total operations
|
$
|
46,721
|
|
|
$
|
43,945
|
|
|
$
|
38,472
|
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - SEGMENT INFORMATION - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Contract assets:
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
33,640
|
|
|
$
|
50,813
|
|
|
$
|
38,412
|
|
United States mechanical construction and facilities services
|
68,058
|
|
|
61,225
|
|
|
49,302
|
|
United States building services
|
31,046
|
|
|
30,428
|
|
|
33,304
|
|
United States industrial services
|
8,657
|
|
|
9,820
|
|
|
14,117
|
|
Total United States operations
|
141,401
|
|
|
152,286
|
|
|
135,135
|
|
United Kingdom building services
|
30,555
|
|
|
25,544
|
|
|
23,108
|
|
Total operations
|
$
|
171,956
|
|
|
$
|
177,830
|
|
|
$
|
158,243
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
184,775
|
|
|
$
|
173,967
|
|
|
$
|
163,951
|
|
United States mechanical construction and facilities services
|
386,180
|
|
|
317,083
|
|
|
280,846
|
|
United States building services
|
105,421
|
|
|
97,588
|
|
|
79,281
|
|
United States industrial services
|
16,027
|
|
|
12,404
|
|
|
12,307
|
|
Total United States operations
|
692,403
|
|
|
601,042
|
|
|
536,385
|
|
United Kingdom building services
|
29,849
|
|
|
22,600
|
|
|
15,905
|
|
Total operations
|
$
|
722,252
|
|
|
$
|
623,642
|
|
|
$
|
552,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
211,432
|
|
|
$
|
215,780
|
|
|
$
|
201,333
|
|
United States mechanical construction and facilities services
|
512,243
|
|
|
530,561
|
|
|
334,628
|
|
United States building services
|
492,290
|
|
|
458,915
|
|
|
436,887
|
|
United States industrial services
|
360,765
|
|
|
615,233
|
|
|
630,340
|
|
Total United States operations
|
1,576,730
|
|
|
1,820,489
|
|
|
1,603,188
|
|
United Kingdom building services
|
12,017
|
|
|
9,622
|
|
|
9,264
|
|
Corporate administration
|
4,356
|
|
|
1,431
|
|
|
1,072
|
|
Total operations
|
$
|
1,593,103
|
|
|
$
|
1,831,542
|
|
|
$
|
1,613,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
United States electrical construction and facilities services
|
$
|
736,395
|
|
|
$
|
834,802
|
|
|
$
|
702,112
|
|
United States mechanical construction and facilities services
|
1,542,531
|
|
|
1,536,325
|
|
|
1,081,005
|
|
United States building services
|
1,032,326
|
|
|
996,664
|
|
|
846,221
|
|
United States industrial services
|
494,178
|
|
|
829,793
|
|
|
864,446
|
|
Total United States operations
|
3,805,430
|
|
|
4,197,584
|
|
|
3,493,784
|
|
United Kingdom building services
|
227,894
|
|
|
181,147
|
|
|
146,379
|
|
Corporate administration
|
1,030,516
|
|
|
451,627
|
|
|
448,644
|
|
Total operations
|
$
|
5,063,840
|
|
|
$
|
4,830,358
|
|
|
$
|
4,088,807
|
|
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SELECTED UNAUDITED QUARTERLY INFORMATION
(In thousands, except per share data)
Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
Sept. 30
|
|
Dec. 31
|
2020 Quarterly Results
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,299,832
|
|
|
$
|
2,014,021
|
|
|
$
|
2,201,714
|
|
|
$
|
2,281,494
|
|
Gross profit
|
|
$
|
333,061
|
|
|
$
|
315,286
|
|
|
$
|
363,184
|
|
|
$
|
383,851
|
|
Impairment loss on goodwill, identifiable intangible assets,
and other long-lived assets
|
|
$
|
—
|
|
|
$
|
232,750
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net income attributable to EMCOR Group, Inc.
|
|
$
|
75,665
|
|
|
$
|
(83,689)
|
|
|
$
|
61,186
|
|
|
$
|
79,781
|
|
Basic EPS from continuing operations
|
|
$
|
1.35
|
|
|
$
|
(1.52)
|
|
|
$
|
1.11
|
|
|
$
|
1.45
|
|
Diluted EPS from continuing operations
|
|
$
|
1.35
|
|
|
$
|
(1.52)
|
|
|
$
|
1.11
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
June 30
|
|
Sept. 30
|
|
Dec. 31
|
2019 Quarterly Results
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,158,728
|
|
|
$
|
2,324,202
|
|
|
$
|
2,287,741
|
|
|
$
|
2,403,940
|
|
Gross profit
|
|
$
|
308,754
|
|
|
$
|
346,380
|
|
|
$
|
335,987
|
|
|
$
|
364,747
|
|
Net income attributable to EMCOR Group, Inc.
|
|
$
|
72,410
|
|
|
$
|
83,972
|
|
|
$
|
81,834
|
|
|
$
|
86,924
|
|
Basic EPS from continuing operations
|
|
$
|
1.29
|
|
|
$
|
1.49
|
|
|
$
|
1.46
|
|
|
$
|
1.54
|
|
Diluted EPS from continuing operations
|
|
$
|
1.28
|
|
|
$
|
1.49
|
|
|
$
|
1.45
|
|
|
$
|
1.54
|
|
NOTE 21 - SUBSEQUENT EVENTS
Subsequent to December 31, 2020, we acquired two companies, each for an immaterial amount. One company provides mechanical services within the Southern region of the United States, and the results of its operations will be included in our United States mechanical construction and facilities services segment. The other company provides electrical construction and maintenance services for a broad array of customers in the Midwestern region of the United States, and the results of its operations will be included in our United States electrical construction and facilities services segment. The acquisition of these businesses will be accounted for by the acquisition method, and the amounts paid will be allocated to their respective assets and liabilities, based upon the estimated fair value of such assets and liabilities at the respective date of acquisition by us.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of EMCOR Group, Inc. and subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of EMCOR Group, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
|
|
|
|
|
|
|
|
|
|
Revenue Recognition from Long-term Construction Contracts
|
Description of the Matter
|
|
As described in Note 3 to the consolidated financial statements, the Company generally recognizes revenue from long-term construction contracts over time using a cost-to-cost input method in which the extent of progress is measured based on the ratio of costs incurred to date to the total estimated costs at completion. In addition, the revenue recognition process requires the Company to determine the transaction price that represents the amount of consideration to which the Company expects to be entitled. A significant portion of the Company’s revenues for the year ended December 31, 2020 were derived from long-term construction contracts.
The determination of revenue recognized from long-term construction contracts commonly requires the Company to estimate variable consideration that arises from pending change orders, contract claims, contract bonuses, and penalties, as well as to prepare estimates of the costs to complete contracts. Factors inherent in the estimation processes include, among others, historical experience with customers, the potential long-term nature of dispute resolutions, actions of third parties as well as the Company’s experience with similar types of contracts. Due to uncertainties attributed to such factors, auditing revenue recognized from long-term construction contracts involved especially challenging, subjective, and complex judgments.
|
How We Addressed the Matter in Our Audit
|
|
We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls related to revenue recognition from long-term construction contracts. For example, we tested controls over the Company’s determination and review of estimates of variable consideration, costs to complete, and the completeness and accuracy of data utilized in conjunction with such estimation processes.
To test the amount of revenue recognized from long-term construction contracts in the current period, we selected a sample of contracts and performed procedures to test the project revenue and cost forecasts. For example, we obtained and inspected the related contract agreements, amendments, and change orders to test the existence of customer arrangements and understand the scope and pricing of the related projects; performed inquiries of management and project personnel regarding facts and circumstances relevant to the accounting for such contracts; tested key components of the estimated costs to complete, including materials, labor, and subcontractors costs; agreed actual costs incurred to supporting documentation; and recalculated revenues recognized based on the project's percentage of completion and management's estimate of transaction price. In addition, we performed certain retrospective review procedures to assess management’s historical ability to accurately estimate the transaction price and costs to complete contracts as well as to identify any significant or unusual changes in project revenue and cost forecasts during the period.
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Goodwill and Indefinite-Lived Intangible Assets
|
Description of the Matter
|
|
At December 31, 2020, the Company’s goodwill and indefinite-lived trade name intangible assets were approximately $851.8 million and $199.5 million, respectively. As discussed in Note 9 to the consolidated financial statements, goodwill and trade names with indefinite lives are tested for impairment at least annually and during any interim period(s) in which impairment indicators are identified. During 2020, the Company recorded a goodwill impairment charge of $225.5 million related to its Industrial Services reporting unit and impairment charges of $6.7 million related to certain of its indefinite-lived trade name intangible assets.
Auditing management’s interim and annual impairment tests was especially complex and subjective due to the significant estimation required in determining the fair value of the reporting units for goodwill and the fair value of trade name intangible assets. In particular, the fair value estimates for goodwill were sensitive to significant assumptions inherent in the Company’s discounted estimated future cash flows such as the weighted average cost of capital, revenue growth rates, and operating margins. The fair value estimates for trade name intangible assets were sensitive to significant assumptions inherent in the Company’s discounted estimated future cash flows such as the royalty rate, discount rate, and revenue growth rates. The fair value estimates for goodwill and trade name intangible assets are affected by expectations about future market or economic conditions, including the effects of the COVID-19 pandemic and other macroeconomic events relevant to certain markets in which the Company operates.
|
How We Addressed the Matter in Our Audit
|
|
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s impairment review processes for goodwill and trade name intangible assets. For example, we tested management’s review controls over the valuation models and significant assumptions described above, including those developed by the Company's third-party valuation specialists.
To test the estimated fair value of the Company’s reporting units and trade name intangible assets, with the support of a valuation specialist, we performed audit procedures that included, among others, assessing methodologies and testing the significant assumptions and completeness and accuracy of the underlying data used by the Company in its analyses. For example, we compared the significant assumptions used by management to the historical financial results of the Company’s reporting units and to current industry and economic trends. We assessed the historical accuracy of management’s estimates by comparing past projections to actual performance and performed sensitivity analyses of significant assumptions to evaluate the changes in fair value that would result from changes in the assumptions. In addition, we reviewed the reconciliation of the aggregate fair value of the Company’s reporting units to the market capitalization of the Company.
|
We have served as the Company’s auditor since 2002.
|
|
|
|
|
|
Stamford, Connecticut
|
|
February 25, 2021
|
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of EMCOR Group, Inc. and subsidiaries:
Opinion on Internal Control Over Financial Reporting
We have audited EMCOR Group, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, EMCOR Group, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020 consolidated financial statements of the Company and our report dated February 25, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
|
|
|
|
|
/s/ ERNST & YOUNG LLP
|
|
|
|
Stamford, Connecticut
|
|
February 25, 2021
|
|