10-KPeriod: FY2003

EMCOR Group, Inc. Annual Report, Year Ended Dec 31, 2003

Filed February 26, 2004For Securities:EME

Summary

EMCOR Group, Inc. reported revenues of $4.53 billion for the year ended December 31, 2003, a notable increase from $3.97 billion in 2002. However, net income saw a significant decline, falling to $20.6 million in 2003 from $62.9 million in 2002, resulting in diluted earnings per share of $1.33, down from $4.07. This performance was impacted by unfavorable market conditions in the United States, including increased competition and a shift towards lower-margin public sector work, as well as poor performance in the United Kingdom construction operations. The company continues its strategy of expanding its facilities services segment, which is considered less cyclical than its construction business. EMCOR also made significant acquisitions in 2002, including Comfort Systems USA and Consolidated Engineering Services, Inc., which contributed to revenue growth but also increased goodwill on the balance sheet.

Key Highlights

  • 1EMCOR reported revenues of $4.53 billion in 2003, an increase of 14.3% from $3.97 billion in 2002, driven by acquisitions and growth in U.S. electrical and facilities services.
  • 2Net income significantly decreased to $20.6 million in 2003 from $62.9 million in 2002, with diluted EPS falling from $4.07 to $1.33.
  • 3The company experienced '2003 Unfavorable United States Market Conditions', including increased competition and a shift to lower-margin public sector work, impacting profitability.
  • 4The United Kingdom construction operations reported poor performance, contributing to the overall decline in earnings.
  • 5EMCOR continues to emphasize its facilities services segment, viewing it as a more stable, less cyclical revenue stream compared to construction.
  • 6Significant acquisitions in 2002 (Comfort Systems USA, Consolidated Engineering Services) contributed to revenue growth but also increased the company's goodwill balance.
  • 7EMCOR did not pay dividends in 2003 or 2002 and does not anticipate doing so in the foreseeable future due to credit facility limitations.

Frequently Asked Questions

The revenue increase in 2003 was primarily driven by the inclusion of revenues from companies acquired in 2002 and 2003, specifically Consolidated Engineering Services, Inc. (CES) and Comfort Systems USA companies. Additionally, increased revenues in the United States electrical construction and facilities services, and United States facilities services segments (excluding acquisitions) also contributed.

The substantial decrease in net income and EPS was attributed to several factors, including poor performance in the United Kingdom construction operations, increased competition and declining gross profit margins on commercial and industrial work in the U.S. due to economic recession, reduced private sector spending on repairs and maintenance, a higher proportion of lower-margin public sector work, and lower-than-historical gross profit margins on several U.S. projects due to poor contract performance. Reduced labor productivity also played a role.

EMCOR's management is considering strategic changes, including a shift in focus towards more private sector commercial work, even if it causes a temporary revenue reduction. They are also focusing on reducing selling, general, and administrative expenses and expect demand for HVAC repair and maintenance services to increase. The long-term strategy of increasing revenues from multi-year facilities services contracts remains a key focus, as this segment is considered less cyclical and provides a more predictable cash flow.

The acquisitions of Comfort Systems USA and Consolidated Engineering Services, Inc. in 2002 significantly contributed to revenue growth. However, these acquisitions also led to a substantial increase in goodwill on the balance sheet, totaling $278.0 million as of December 31, 2003. The company adopted SFAS 142, which requires annual impairment testing for goodwill rather than amortization, so the impact on earnings from goodwill is primarily through potential impairment charges, which had not occurred as of this filing.