Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM	10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-8267

EMCOR Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		11-2125338
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
301 Merritt Seven
Norwalk,	Connecticut	06851-1092
(Address of Principal Executive Offices)		(Zip Code)



(203)	849-7800
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	EME	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Applicable Only To Corporate Issuers

Number of shares of Common Stock outstanding as of the close of business on October 24, 2019: 56,153,125 shares.

Table of Contents

EMCOR Group, Inc.

INDEX



		Page No.
PART I. - Financial Information.
Item 1.	Financial Statements.
	Consolidated Balance Sheets - as of September 30, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations - three and nine months ended September 30, 2019 and 2018	2
	Condensed Consolidated Statements of Comprehensive Income - three and nine months ended September 30, 2019 and 2018	3
	Condensed Consolidated Statements of Cash Flows - nine months ended September 30, 2019 and 2018	4
	Condensed Consolidated Statements of Equity - three months ended September 30, 2019 and 2018	5
	Condensed Consolidated Statements of Equity - nine months ended September 30, 2019 and 2018	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	43
Item 4.	Controls and Procedures.	43
PART II. - Other Information.
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	44
Item 4.	Mine Safety Disclosures.	44
Item 6.	Exhibits.	44

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PART I. – FINANCIAL INFORMATION.

ITEM 1. FINANCIAL STATEMENTS.

EMCOR Group, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)



	September 30, 2019 (Unaudited)			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	368,073		$	363,907
Accounts receivable, less allowance for doubtful accounts of $15,095 and $15,361, respectively	1,926,765			1,773,620
Contract assets	179,005			158,243
Inventories	38,721			42,321
Prepaid expenses and other	45,549			48,116
Total current assets	2,558,113			2,386,207
Investments, notes and other long-term receivables	1,478			2,899
Property, plant and equipment, net	149,023			134,351
Operating lease right-of-use assets	232,996			—
Goodwill	1,019,590			990,887
Identifiable intangible assets, net	482,785			488,286
Other assets	88,736			86,177
Total assets	$	4,532,721		$	4,088,807
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt and finance lease liabilities	$	18,196		$	16,013
Accounts payable	584,824			652,091
Contract liabilities	565,957			552,290
Accrued payroll and benefits	387,351			343,069
Other accrued expenses and liabilities	185,414			170,935
Operating lease liabilities, current	51,632			—
Total current liabilities	1,793,374			1,734,398
Borrowings under revolving credit facility	—			25,000
Long-term debt and finance lease liabilities	247,837			254,764
Operating lease liabilities, long-term	193,502			—
Other long-term obligations	322,197			333,204
Total liabilities	2,556,910			2,347,366
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, 60,287,296 and 60,123,184 shares issued, respectively	603			601
Capital surplus	30,786			21,103
Accumulated other comprehensive loss	(87,370		)	(87,662		)
Retained earnings	2,285,083			2,060,440
Treasury stock, at cost 4,139,421 shares	(253,937		)	(253,937		)
Total EMCOR Group, Inc. stockholders’ equity	1,975,165			1,740,545
Noncontrolling interests	646			896
Total equity	1,975,811			1,741,441
Total liabilities and equity	$	4,532,721		$	4,088,807

See Notes to Consolidated Financial Statements.

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EMCOR Group, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)(Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Revenues	$	2,287,741		$	2,047,049		$	6,770,671		$	5,901,323
Cost of sales	1,951,754			1,737,710			5,779,550			5,032,021
Gross profit	335,987			309,339			991,121			869,302
Selling, general and administrative expenses	220,119			197,334			652,536			578,266
Restructuring expenses	119			229			567			693
Impairment loss on identifiable intangible assets	—			—			—			907
Operating income	115,749			111,776			338,018			289,436
Net periodic pension (cost) income	381			615			1,187			2,069
Interest expense, net	(2,678		)	(2,736		)	(8,732		)	(8,011		)
Income from continuing operations before income taxes	113,452			109,655			330,473			283,494
Income tax provision	31,618			29,711			92,257			76,873
Income from continuing operations	81,834			79,944			238,216			206,621
Loss from discontinued operation, net of income taxes	—			(523		)	—			(1,010		)
Net income including noncontrolling interests	81,834			79,421			238,216			205,611
Less: Net income attributable to noncontrolling interests	—			(48		)	—			(48		)
Net income attributable to EMCOR Group, Inc.	$	81,834		$	79,373		$	238,216		$	205,563

Basic earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders	$	1.46		$	1.37		$	4.24		$	3.54
From discontinued operation	—			(0.01		)	—			(0.02		)
Net income attributable to EMCOR Group, Inc. common stockholders	$	1.46		$	1.36		$	4.24		$	3.52
Diluted earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders	$	1.45		$	1.36		$	4.22		$	3.52
From discontinued operation	—			(0.01		)	—			(0.02		)
Net income attributable to EMCOR Group, Inc. common stockholders	$	1.45		$	1.35		$	4.22		$	3.50

Dividends declared per common share	$	0.08		$	0.08		$	0.24		$	0.24

See Notes to Consolidated Financial Statements.

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EMCOR Group, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)(Unaudited)



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Net income including noncontrolling interests	$	81,834		$	79,421		$	238,216		$	205,611
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments	(983		)	(289		)	(1,280		)	(669		)
Post retirement plans, amortization of actuarial loss included in net income ⁽¹⁾	509			573			1,572			1,553
Other comprehensive (loss) income	(474		)	284			292			884
Comprehensive income	81,360			79,705			238,508			206,495
Less: Comprehensive income attributable to noncontrolling interests	—			(48		)	—			(48		)
Comprehensive income attributable to EMCOR Group, Inc.	$	81,360		$	79,657		$	238,508		$	206,447

_________


(1)	Net of tax of $0.1 million for each of the three months ended September 30, 2019 and 2018, and net of tax of $0.4 million and $0.7 million for the nine months ended September 30, 2019 and 2018, respectively.

See Notes to Consolidated Financial Statements.

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EMCOR Group, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)(Unaudited)



	Nine months ended September 30,
	2019			2018
Cash flows - operating activities:
Net income including noncontrolling interests	$	238,216		$	205,611
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	32,412			28,685
Amortization of identifiable intangible assets	34,500			31,482
Provision for doubtful accounts	1,621			261
Deferred income taxes	(913		)	4,685
Excess tax benefits from share-based compensation	(601		)	(1,065		)
Equity loss (income) from unconsolidated entities	1,213			(247		)
Non-cash expense from contingent consideration arrangements	1,203			186
Non-cash expense for impairment of identifiable intangible assets	—			907
Non-cash share-based compensation expense	8,840			8,502
Distributions from unconsolidated entities	916			2,442
Other reconciling items	364			446
Changes in operating assets and liabilities, excluding the effect of businesses acquired	(140,850		)	(216,003		)
Net cash provided by operating activities	176,921			65,892
Cash flows - investing activities:
Payments for acquisitions of businesses, net of cash acquired	(79,984		)	(25,710		)
Proceeds from sale of property, plant and equipment	1,612			915
Purchase of property, plant and equipment	(35,829		)	(28,674		)
Investments in and advances to unconsolidated entities	(794		)	(3,484		)
Distributions from unconsolidated entities	38			82
Net cash used in investing activities	(114,957		)	(56,871		)
Cash flows - financing activities:
Repayments of revolving credit facility	(25,000		)	—
Repayments of long-term debt and debt issuance costs	(11,400		)	(11,434		)
Repayments of finance lease liabilities	(3,357		)	(1,050		)
Dividends paid to stockholders	(13,458		)	(14,036		)
Repurchase of common stock	—			(90,804		)
Taxes paid related to net share settlements of equity awards	(3,771		)	(3,745		)
Issuance of common stock under employee stock purchase plan	4,501			4,286
Payments for contingent consideration arrangements	(3,589		)	(3,300		)
Distributions to noncontrolling interests	(250		)	—
Net cash used in financing activities	(56,324		)	(120,083		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(2,047		)	(1,985		)
Increase (decrease) in cash, cash equivalents and restricted cash	3,593			(113,047		)
Cash, cash equivalents and restricted cash at beginning of year ⁽¹⁾	366,214			469,388
Cash, cash equivalents and restricted cash at end of period ⁽²⁾	$	369,807		$	356,341
Supplemental cash flow information:
Cash paid for:
Interest	$	9,891		$	9,078
Income taxes	$	94,514		$	95,330

_________


(1)	Includes $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, 2018 and 2017, respectively.


(2)	Includes $1.7 million and $2.4 million of restricted cash classified as “Prepaid expenses and other” in the Consolidated Balance Sheets as of September 30, 2019 and 2018, respectively.

See Notes to Consolidated Financial Statements.

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EMCOR Group, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the three months ended September 30, 2018 and 2019

(In thousands)(Unaudited)



				EMCOR Group, Inc. Stockholders
	Total			Common stock		Capital surplus			Accumulated other comprehensive loss ⁽¹⁾			Retained earnings			Treasury stock			Noncontrolling interests
Balance, June 30, 2018	$	1,735,133		$	600	$	13,054		$	(93,600	)	$	1,912,430		$	(98,201	)	$	850
Net income including noncontrolling interests	79,421			—		—			—			79,373			—			48
Other comprehensive income	284			—		—			284			—			—			—
Common stock issued under employee stock purchase plan	1,528			1		1,527			—			—			—			—
Common stock dividends	(4,655		)	—		35			—			(4,690		)	—			—
Repurchase of common stock	(35,131		)	—		—			—			—			(35,131		)	—
Share-based compensation expense	2,546			—		2,546			—			—			—			—
Balance, September 30, 2018	$	1,779,126		$	601	$	17,162		$	(93,316	)	$	1,987,113		$	(133,332	)	$	898
Balance, June 30, 2019	$	1,894,831		$	603	$	26,640		$	(86,896	)	$	2,207,775		$	(253,937	)	$	646
Net income including noncontrolling interests	81,834			—		—			—			81,834			—			—
Other comprehensive loss	(474		)	—		—			(474		)	—			—			—
Tax withholding for common stock issued under share-based compensation plans	(36		)	—		(36		)	—			—			—			—
Common stock issued under employee stock purchase plan	1,532			—		1,532			—			—			—			—
Common stock dividends	(4,491		)	—		35			—			(4,526		)	—			—
Share-based compensation expense	2,615			—		2,615			—			—			—			—
Balance, September 30, 2019	$	1,975,811		$	603	$	30,786		$	(87,370	)	$	2,285,083		$	(253,937	)	$	646

_________


(1)	Represents cumulative foreign currency translation adjustments and post retirement liability adjustments.

See Notes to Consolidated Financial Statements.

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EMCOR Group, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the nine months ended September 30, 2018 and 2019

(In thousands)(Unaudited)



				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	205,611			—		—			—			205,563			—			48
Other comprehensive income	884			—		—			884			—			—			—
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	(3,745		)	—		(3,745		)	—			—			—			—
Common stock issued under employee stock purchase plan	4,286			1		4,285			—			—			—			—
Common stock dividends	(14,036		)	—		116			—			(14,152		)	—			—
Repurchase of common stock	(95,639		)	—		—			—			—			(95,639		)	—
Share-based compensation expense	8,502			—		8,502			—			—			—			—
Balance, September 30, 2018	$	1,779,126		$	601	$	17,162		$	(93,316	)	$	1,987,113		$	(133,332	)	$	898
Balance, December 31, 2018	$	1,741,441		$	601	$	21,103		$	(87,662	)	$	2,060,440		$	(253,937	)	$	896
Net income including noncontrolling interests	238,216			—		—			—			238,216			—			—
Other comprehensive income	292			—		—			292			—			—			—
Common stock issued under share-based compensation plans	—			2		(2		)	—			—			—			—
Tax withholding for common stock issued under share-based compensation plans	(3,771		)	—		(3,771		)	—			—			—			—
Common stock issued under employee stock purchase plan	4,501			—		4,501			—			—			—			—
Common stock dividends	(13,458		)	—		115			—			(13,573		)	—			—
Distributions to noncontrolling interests	(250		)	—		—			—			—			—			(250		)
Share-based compensation expense	8,840			—		8,840			—			—			—			—
Balance, September 30, 2019	$	1,975,811		$	603	$	30,786		$	(87,370	)	$	2,285,083		$	(253,937	)	$	646

_________


(1)	Represents cumulative foreign currency translation adjustments and post retirement liability adjustments.


(2)	Represents adjustment to retained earnings upon the adoption of Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers.”

See Notes to Consolidated Financial Statements.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. References to the “Company,” “EMCOR,” “we,” “us,” “our” and similar words refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise. Readers of this report should refer to the consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission.

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of those of a normal recurring nature) necessary to present fairly our financial position and the results of our operations. Our reportable segments reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States industrial services segment due to changes in our internal reporting structure.

The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.

NOTE 2 New Accounting Pronouncements

On January 1, 2019, we adopted the accounting pronouncement issued by the Financial Accounting Standards Board (“FASB”) to replace existing lease accounting guidance. This pronouncement is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. Expenses associated with leases continue to be recognized in a manner similar to previous accounting guidance. We adopted this pronouncement utilizing the transition practical expedient added by the FASB, which eliminated the requirement that entities apply the new lease standard to the comparative periods presented in the year of adoption. The adoption of this accounting pronouncement resulted in the recognition of operating lease right-of-use assets and associated lease liabilities on our balance sheet of $220.2 million and $227.1 million, respectively, as of January 1, 2019. Additional required disclosures have been included within Note 14 - Leases of the notes to consolidated financial statements. Such adoption did not have an impact on our liquidity, results of operations or our compliance with the various covenants contained within our 2016 Credit Agreement as described in further detail within Note 8 - Debt of the notes to consolidated financial statements.

On January 1, 2019, we adopted the accounting pronouncement issued by the FASB related to the reporting of certain items in accumulated other comprehensive income (loss) (“AOCI”). This guidance provides entities the option to reclassify to retained earnings certain tax effects stranded in AOCI as a result of tax reform. As part of our adoption of this accounting pronouncement, we elected not to reclassify the stranded tax effects related to the retirement plans of our United States subsidiaries as such amounts are immaterial. Tax effects remaining in AOCI will be released upon liquidation of each individual retirement plan.

In June 2016, an accounting pronouncement was issued by the FASB which changes the way in which entities estimate and present credit losses for most financial assets, including accounts receivable. This pronouncement is effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. In preparation for adoption, we have substantially completed a process to identify and group financial assets with similar characteristics into collective pools. We have additionally begun implementing processes and internal controls to identify information, including macroeconomic forecasts and key credit indicators, relevant to estimating expected credit losses. As a result, we are in the process of quantifying the impact that the adoption of this accounting pronouncement will have 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) collectibility 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,

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 3 Revenue from Contracts with Customers - (Continued)

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 collectibility 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.

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,

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 3 Revenue from Contracts with Customers - (Continued)

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.

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. For the three and nine months ended September 30, 2019, there were no significant amounts of revenue recognized during the period related to performance obligations satisfied in prior periods. For the three and nine months ended September 30, 2018, we recognized revenue of $6.3 million associated with the final settlement of contract value for two projects which were completed in prior periods. In addition, for the three and nine months ended September 30, 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.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 3 Revenue from Contracts with Customers - (Continued)

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. For the three and nine months ended September 30, 2019, there were no changes in total estimated costs that had a significant impact on our operating results. During the three and nine months ended September 30, 2018, we recognized losses of $4.7 million and $5.5 million, respectively, 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. There were no significant losses recognized during the three and nine months ended September 30, 2019.

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 15 - Segment Information of the notes to 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.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

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 for the three and nine months ended September 30, 2019 and 2018 (in thousands):



	For the three months ended September 30,
	2019			% of Total		2018			% of Total
United States electrical construction and facilities services:
Commercial market sector	$	260,871		47	%	$	196,293		40	%
Institutional market sector	33,702			6	%	27,903			6	%
Hospitality market sector	2,243			1	%	9,860			2	%
Manufacturing market sector	121,488			22	%	100,563			20	%
Healthcare market sector	24,701			4	%	28,121			6	%
Transportation market sector	52,744			9	%	72,816			15	%
Water and wastewater market sector	3,709			1	%	4,194			1	%
Short duration projects ⁽¹⁾	42,296			7	%	38,452			8	%
Service work	14,174			3	%	8,147			2	%
	555,928					486,349
Less intersegment revenues	(1,291		)			(375		)
Total segment revenues	$	554,637				$	485,974



United States mechanical construction and facilities services:
Commercial market sector	$	293,202		33	%	$	287,350		38	%
Institutional market sector	94,886			11	%	77,676			10	%
Hospitality market sector	6,888			1	%	26,170			3	%
Manufacturing market sector	150,199			17	%	89,779			12	%
Healthcare market sector	84,418			10	%	55,843			7	%
Transportation market sector	7,855			1	%	3,072			1	%
Water and wastewater market sector	42,637			5	%	43,033			6	%
Short duration projects ⁽¹⁾	91,897			10	%	72,388			9	%
Service work	100,196			12	%	107,168			14	%
	872,178					762,479
Less intersegment revenues	(2,990		)			(2,984		)
Total segment revenues	$	869,188				$	759,495

________


(1)	Represents those projects which generally are completed within three months or less.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 3 Revenue from Contracts with Customers - (Continued)



	For the three months ended September 30,
	2019		% of Total		2018		% of Total
United States building services:
Commercial site-based services	$	133,179	25	%	$	120,917	26	%
Government site-based services	42,412		8	%	52,332		11	%
Mechanical services	333,696		63	%	276,722		58	%
Energy services	22,835		4	%	23,730		5	%
Total segment revenues	$	532,122			$	473,701



United States industrial services:
Field services	$	194,569	83	%	$	181,873	80	%
Shop services	39,597		17	%	45,440		20	%
Total segment revenues	$	234,166			$	227,313

Total United States operations	$	2,190,113			$	1,946,483



United Kingdom building services:
Service work	$	49,098	50	%	$	51,815	52	%
Projects & extras	48,530		50	%	48,751		48	%
Total segment revenues	$	97,628			$	100,566

Total worldwide operations	$	2,287,741			$	2,047,049



	For the nine months ended September 30,
	2019			% of Total		2018			% of Total
United States electrical construction and facilities services:
Commercial market sector	$	816,602		49	%	$	579,958		41	%
Institutional market sector	87,643			5	%	86,971			6	%
Hospitality market sector	11,930			1	%	22,665			2	%
Manufacturing market sector	338,448			20	%	280,375			20	%
Healthcare market sector	63,725			4	%	103,307			7	%
Transportation market sector	162,538			10	%	216,591			15	%
Water and wastewater market sector	14,342			1	%	14,947			1	%
Short duration projects ⁽¹⁾	124,152			8	%	93,177			6	%
Service work	35,439			2	%	25,151			2	%
	1,654,819					1,423,142
Less intersegment revenues	(2,710		)			(2,874		)
Total segment revenues	$	1,652,109				$	1,420,268

________


(1)	Represents those projects which generally are completed within three months or less.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 3 Revenue from Contracts with Customers - (Continued)



	For the nine months ended September 30,
	2019			% of Total		2018			% of Total
United States mechanical construction and facilities services:
Commercial market sector	$	874,512		36	%	$	780,629		36	%
Institutional market sector	232,843			9	%	219,830			10	%
Hospitality market sector	28,807			1	%	73,888			3	%
Manufacturing market sector	386,853			16	%	271,133			13	%
Healthcare market sector	220,445			9	%	181,669			8	%
Transportation market sector	22,880			1	%	13,002			1	%
Water and wastewater market sector	131,385			5	%	122,275			6	%
Short duration projects ⁽¹⁾	273,001			11	%	223,200			10	%
Service work	282,094			12	%	291,694			13	%
	2,452,820					2,177,320
Less intersegment revenues	(8,137		)			(9,193		)
Total segment revenues	$	2,444,683				$	2,168,127

________


(1)	Represents those projects which generally are completed within three months or less.



	For the nine months ended September 30,
	2019		% of Total		2018		% of Total
United States building services:
Commercial site-based services	$	420,078	27	%	$	386,721	28	%
Government site-based services	133,990		8	%	162,888		12	%
Mechanical services	920,684		59	%	764,313		55	%
Energy services	93,147		6	%	75,564		5	%
Total segment revenues	$	1,567,899			$	1,389,486



United States industrial services:
Field services	$	664,188	84	%	$	486,362	80	%
Shop services	124,083		16	%	124,117		20	%
Total segment revenues	$	788,271			$	610,479

Total United States operations	$	6,452,962			$	5,588,360



United Kingdom building services:
Service work	$	160,561	51	%	$	162,088	52	%
Projects & extras	157,148		49	%	150,875		48	%
Total segment revenues	$	317,709			$	312,963

Total worldwide operations	$	6,770,671			$	5,901,323

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 3 Revenue from Contracts with Customers - (Continued)

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 doubtful accounts. 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.

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.

Net contract liabilities consisted of the following (in thousands):



	September 30, 2019			December 31, 2018
Contract assets, current	$	179,005		$	158,243
Contract assets, non-current	—			—
Contract liabilities, current	(565,957		)	(552,290		)
Contract liabilities, non-current	(2,025		)	(2,069		)
Net contract liabilities	$	(388,977	)	$	(396,116	)

The $7.1 million decrease in net contract liabilities for the nine months ended September 30, 2019 was primarily attributable to a decrease in net contract liabilities on our uncompleted long-term construction contracts, partially as a result of the timing of billings to our customers. Contract assets and contract liabilities increased by approximately $6.2 million and $13.0 million, respectively, as a result of acquisitions made by us in 2019. There was no significant impairment of contract assets recognized during either period presented.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

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):



	September 30, 2019		% of Total
Remaining performance obligations:
United States electrical construction and facilities services	$	1,095,254	27	%
United States mechanical construction and facilities services	2,190,556		54	%
United States building services	544,913		14	%
United States industrial services	83,478		2	%
Total United States operations	3,914,201		97	%
United Kingdom building services	120,887		3	%
Total worldwide operations	$	4,035,088	100	%

Our remaining performance obligations at September 30, 2019 were $4.04 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 due to the inherent substantial economic penalty that would be incurred by our customers upon cancellation. 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.

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	$	999,218	$	96,036
United States mechanical construction and facilities services	1,758,285		432,271
United States building services	534,628		10,285
United States industrial services	83,478		—
Total United States operations	3,375,609		538,592
United Kingdom building services	80,841		40,046
Total worldwide operations	$	3,456,450	$	578,638

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

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 on the estimated fair value of such assets and liabilities at the dates of their respective acquisition by us.

During the first nine months of 2019, we acquired five companies for total consideration of $83.6 million. One company provides electrical contracting services in central Iowa and its results have been included within our United States electrical construction and facilities services segment. Another company provides mechanical contracting services in south-central and eastern Texas and its results have been included within our United States mechanical construction and facilities services segment. The results of operations for the remaining three companies have been included within our United States building services segment. Of these three companies, one company provides mobile mechanical services in the Southern region of the United States while the remaining two companies provide building automation and controls solutions in the Western region of the United States. In connection with these acquisitions, we acquired working capital of $25.3 million and other net assets of $1.0 million and have preliminarily ascribed $28.3 million to goodwill and $29.0 million to identifiable intangible assets.

During calendar year 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 its results 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 preliminarily ascribed $26.3 million to goodwill and $36.6 million to identifiable intangible assets.

We expect that all of the goodwill acquired in connection with these acquisitions will be deductible for tax purposes. The purchase price allocations for the businesses acquired in 2019 and one of the businesses acquired in 2018 are preliminary and subject to change during their respective measurement periods. The purchase price allocations for the remaining three businesses acquired in 2018 have been finalized 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 the discontinued operation for the three and nine months ended September 30, 2019.

The results of discontinued operations for the three and nine months ended September 30, 2018 were as follows (in thousands):



	For the three months ended September 30, 2018			For the nine months ended September 30, 2018
Revenues	$	—		$	—
Loss from discontinued operation, net of income taxes	$	(523	)	$	(1,010	)
Diluted loss per share from discontinued operation	$	(0.01	)	$	(0.02	)

The loss from discontinued operations in 2018 was primarily due to legal costs related to the settlement of final contract balances on certain construction projects completed in prior years.

Included in the Consolidated Balance Sheet at December 31, 2018 were approximately $3.7 million of current liabilities associated with the discontinued operation, primarily consisting of contract retentions, contract warranty obligations and other accrued expenses. No significant liabilities remain as of September 30, 2019.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 6 Earnings Per Share

Calculation of Basic and Diluted Earnings (Loss) per Common Share

The following tables summarize our calculation of Basic and Diluted Earnings (Loss) per Common Share (“EPS”) for the three and nine months ended September 30, 2019 and 2018 (in thousands, except share and per share data):



	For the three months ended September 30,
	2019		2018
Numerator:
Income from continuing operations attributable to EMCOR Group, Inc. common stockholders	$	81,834	$	79,896
Loss from discontinued operation, net of income taxes	—		(523		)
Net income attributable to EMCOR Group, Inc. common stockholders	$	81,834	$	79,373
Denominator:
Weighted average shares outstanding used to compute basic earnings (loss) per common share	56,216,840		58,208,203
Effect of dilutive securities—Share-based awards	341,610		333,107
Shares used to compute diluted earnings (loss) per common share	56,558,450		58,541,310
Basic earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders	$	1.46	$	1.37
From discontinued operation	—		(0.01		)
Net income attributable to EMCOR Group, Inc. common stockholders	$	1.46	$	1.36
Diluted earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders	$	1.45	$	1.36
From discontinued operation	—		(0.01		)
Net income attributable to EMCOR Group, Inc. common stockholders	$	1.45	$	1.35



	For the nine months ended September 30,
	2019		2018
Numerator:
Income from continuing operations attributable to EMCOR Group, Inc. common stockholders	$	238,216	$	206,573
Loss from discontinued operation, net of income taxes	—		(1,010		)
Net income attributable to EMCOR Group, Inc. common stockholders	$	238,216	$	205,563
Denominator:
Weighted average shares outstanding used to compute basic earnings (loss) per common share	56,189,388		58,422,928
Effect of dilutive securities—Share-based awards	305,042		331,939
Shares used to compute diluted earnings (loss) per common share	56,494,430		58,754,867
Basic earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders	$	4.24	$	3.54
From discontinued operation	—		(0.02		)
Net income attributable to EMCOR Group, Inc. common stockholders	$	4.24	$	3.52
Diluted earnings (loss) per common share:
From continuing operations attributable to EMCOR Group, Inc. common stockholders	$	4.22	$	3.52
From discontinued operation	—		(0.02		)
Net income attributable to EMCOR Group, Inc. common stockholders	$	4.22	$	3.50

There were no anti-dilutive share-based awards for the three and nine months ended September 30, 2019 and the three months ended September 30, 2018. The number of outstanding share-based awards that were excluded from the computation of diluted EPS for the nine months ended September 30, 2018 because they would be anti-dilutive were 550.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 7 Inventories

Inventories in the accompanying Consolidated Balance Sheets consisted of the following amounts (in thousands):



	September 30, 2019		December 31, 2018
Raw materials and construction materials	$	29,829	$	30,006
Work in process	8,892		12,315
Inventories	$	38,721	$	42,321

NOTE 8 Debt

Debt in the accompanying Consolidated Balance Sheets consisted of the following amounts (in thousands):



	September 30, 2019			December 31, 2018
Revolving credit facility	$	—		$	25,000
Term loan	258,228			269,620
Unamortized debt issuance costs	(2,175		)	(3,065		)
Finance lease obligations ⁽¹⁾	9,980			4,213
Other	—			9
Total debt	266,033			295,777
Less: current maturities	18,196			16,013
Total long-term debt	$	247,837		$	279,764

________


(1)	See Note 14 - Leases for further disclosure regarding finance lease obligations.

Credit Agreement

We have a credit agreement dated as of August 3, 2016, which provides 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”) expiring August 3, 2021. We may increase the 2016 Revolving Credit Facility to $1.3 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $300.0 million of available capacity under the 2016 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries. Obligations under the 2016 Credit Agreement are guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets. The 2016 Credit Agreement contains various covenants providing for, among other things, maintenance of certain financial ratios and certain limitations on payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. We were in compliance with all such covenants as of September 30, 2019 and December 31, 2018. A commitment fee is payable on the average daily unused amount of the 2016 Revolving Credit Facility, which ranges from 0.15% to 0.30%, based on certain financial tests. The fee was 0.15% of the unused amount as of September 30, 2019. Borrowings under the 2016 Credit Agreement bear interest at (1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2) United States dollar LIBOR (2.04% at September 30, 2019) 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 (5.00% at September 30, 2019), (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 September 30, 2019 was 3.04%. Fees for letters of credit issued under the 2016 Revolving Credit Facility range from 1.00% to 1.75% of the respective face amounts of outstanding letters of credit and are computed based on certain financial tests. Debt issuance costs are amortized over the life of the agreement and are included as part of interest expense. The 2016 Term Loan previously required us to make principal payments of $5.0 million on the last day of March, June, September and December of each year, which commenced with the calendar quarter ended December 31, 2016. On December 30, 2016, we made a payment of $100.0 million, of which $5.0 million represented our required quarterly payment and $95.0 million represented a prepayment of outstanding principal. Such prepayment was applied against the remaining mandatory quarterly payments on a ratable basis. As a result, commencing with the calendar quarter ended March 31, 2017, our required quarterly payment has been reduced to $3.8 million. All unpaid principal and interest is due on August 3, 2021. As of September 30, 2019 and December 31, 2018, the balance of the 2016 Term Loan was $258.2 million and $269.6 million, respectively. As of September 30, 2019 and December 31, 2018, we had approximately $109.0 million of letters of credit outstanding. There were no borrowings outstanding under the 2016 Revolving Credit Facility as of September 30, 2019. There were $25.0 million in borrowings outstanding under the 2016 Revolving Credit Facility as of December 31, 2018.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 9 Fair Value Measurements

We use a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, which gives the highest priority to quoted prices in active markets, is comprised of the following three levels:

Level 1 – Unadjusted quoted market prices in active markets for identical assets and liabilities.

Level 2 – Observable inputs, other than Level 1 inputs. Level 2 inputs would typically include quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

Level 3 – Prices or valuations that require inputs that are both significant to the measurement and unobservable.

The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2019 and December 31, 2018 (in thousands):



	Assets at Fair Value as of September 30, 2019
Asset Category	Level 1		Level 2		Level 3		Total
Cash and cash equivalents ⁽¹⁾	$	368,073	$	—	$	—	$	368,073
Restricted cash ⁽²⁾	1,734		—		—		1,734
Deferred compensation plan assets ⁽³⁾	27,937		—		—		27,937
Total	$	397,744	$	—	$	—	$	397,744



	Assets at Fair Value as of December 31, 2018
Asset Category	Level 1		Level 2		Level 3		Total
Cash and cash equivalents ⁽¹⁾	$	363,907	$	—	$	—	$	363,907
Restricted cash ⁽²⁾	2,307		—		—		2,307
Deferred compensation plan assets ⁽³⁾	23,124		—		—		23,124
Total	$	389,338	$	—	$	—	$	389,338

________


(1)	Cash and cash equivalents include money market funds with original maturity dates of three months or less, which are Level 1 assets. At September 30, 2019 and December 31, 2018, we had $176.6 million and $161.3 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.

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 2016 Credit Agreement approximates its fair value due to the variable rate on such debt.

NOTE 10 Income Taxes

In 2018, we finalized our accounting for the income tax effects of the Tax Cuts and Jobs Act (the “Tax Act”). We continue to monitor for potential future changes in certain state and local tax regulations resulting from the Tax Act which may have an impact on our consolidated income tax provision in future periods.

For the three months ended September 30, 2019 and 2018, our income tax provision from continuing operations was $31.6 million and $29.7 million, respectively, based on an effective income tax rate, before discrete items and less amounts attributable to noncontrolling interests, of 27.9% and 27.7%, respectively. The actual income tax rate on income from continuing operations, less amounts attributable to noncontrolling interests, for the three months ended September 30, 2019 and 2018, inclusive of discrete items, was 27.9% and 27.1%, respectively. For the nine months ended September 30, 2019 and 2018, our income tax provision from continuing operations was $92.3 million and $76.9 million, respectively, based on an effective income tax rate, before discrete items and less amounts attributable to noncontrolling interests, of 28.1% and 27.7%, respectively. The actual income tax rate on income from continuing operations, less amounts attributable to noncontrolling interests, for the nine months ended September 30, 2019 and 2018, inclusive of discrete items, was 27.9% and 27.1%, respectively. The actual income tax rates differed from the statutory tax rate due to state and local income taxes and other permanent book to tax differences. The increase in the 2019 income tax provision was primarily due to increased income from continuing operations. The increase in the actual income tax rate on income from continuing operations for both the three and nine months ended September 30, 2019 compared to the three and nine

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 10 Income Taxes - (Continued)

months ended September 30, 2018, was primarily due to the continued application of the Tax Act, including the implementation of interpretative guidance issued regarding certain permanent differences and other non-deductible expenses.

As of September 30, 2019 and December 31, 2018, we had no unrecognized income tax benefits.

We file income tax returns with the Internal Revenue Service and various state, local and foreign tax agencies. The Company is currently under examination by various taxing authorities for the years 2014 through 2017.

NOTE 11 Common Stock

As of September 30, 2019 and December 31, 2018, there were 56,147,875 and 55,983,763 shares of our common stock outstanding, respectively.

During the three months ended September 30, 2019 and 2018, we issued 18,651 and 47,125 shares of common stock, respectively. During the nine months ended September 30, 2019 and 2018, we issued 164,112 and 218,055 shares of common stock, respectively. These shares were issued primarily upon: (a) the satisfaction of required conditions under certain of our share-based compensation plans and (b) the purchase of common stock pursuant to our employee stock purchase plan.

We have paid quarterly dividends since October 25, 2011. We currently pay a regular quarterly dividend of $0.08 per share.

On September 26, 2011, our Board of Directors (the “Board”) authorized us to repurchase up to $100.0 million of our outstanding common stock. Subsequently, the Board has from time to time increased the amount of our common stock that we may repurchase. Since the inception of the repurchase program, the Board has authorized us to repurchase up to $950.0 million of our outstanding common stock. No shares of our common stock were repurchased during the nine months ended September 30, 2019. Since the inception of the repurchase program through September 30, 2019, we have repurchased approximately 15.9 million shares of our common stock for approximately $791.5 million. As of September 30, 2019, there remained authorization for us to repurchase approximately $158.5 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 2016 Credit Agreement, placing limitations on such repurchases. The repurchase program has been and will be funded from our operations.

NOTE 12 Retirement Plans

Our United Kingdom subsidiary has a defined benefit pension plan covering all eligible employees (the “UK Plan”); however, no individual joining the company after October 31, 2001 may participate in the UK Plan. On May 31, 2010, we curtailed the future accrual of benefits for active employees under such plan. We also sponsor three domestic retirement plans in which participation by new individuals is frozen.

Components of Net Periodic Pension Cost

The components of net periodic pension cost (income) of the UK Plan for the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands):



	For the three months ended September 30,						For the nine months ended September 30,
	2019			2018			2019			2018
Interest cost	$	1,925		$	1,959		$	5,968		$	6,103
Expected return on plan assets	(2,941		)	(3,344		)	(9,121		)	(10,415		)
Amortization of unrecognized loss	566			638			1,756			1,985
Net periodic pension cost (income)	$	(450	)	$	(747	)	$	(1,397	)	$	(2,327	)

The net periodic pension cost associated with the domestic plans was approximately $0.1 million for each of the three months ended September 30, 2019 and 2018 and $0.2 million for each of the nine months ended September 30, 2019 and 2018.

Employer Contributions

For the nine months ended September 30, 2019, our United Kingdom subsidiary contributed approximately $3.1 million to the UK Plan and anticipates contributing an additional $1.2 million during the remainder of 2019. Contributions to the domestic plans were approximately $0.2 million for the nine months ended September 30, 2019.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 13 Commitments and Contingencies

Government Contracts

As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, 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.

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. Other potential claims may exist that have not yet been asserted against us. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations or liquidity. Litigation is subject to many uncertainties and the outcome of litigation is not predictable with assurance. It is possible that some litigation matters for which liabilities have not been recorded could be decided unfavorably to us, and that any such unfavorable decisions could have a material adverse effect on our financial position, results of operations or liquidity.

Restructuring expenses

Restructuring expenses, relating to employee severance obligations, were $0.1 million and $0.6 million for the three and nine months ended September 30, 2019, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, the balance of restructuring obligations yet to be paid was $0.7 million. Such remaining amounts will be paid pursuant to our contractual obligations throughout 2020 and 2021. No material expenses in connection with restructuring from continuing operations are expected to be incurred during the remainder of 2019.

The changes in restructuring activity by reportable segment during the nine months ended September 30, 2019 and 2018 were as follows (in thousands):



	United States electrical construction and facilities services segment			United States building services segment			Corporate administration			Total
Balance at December 31, 2017	$	452		$	40		$	—		$	492
Charges	—			693			—			693
Payments	(330		)	(646		)	—			(976		)
Balance at September 30, 2018	$	122		$	87		$	—		$	209
Balance at December 31, 2018	$	30		$	176		$	1,424		$	1,630
Charges	—			567			—			567
Payments	(30		)	(708		)	(723		)	(1,461		)
Balance at September 30, 2019	$	—		$	35		$	701		$	736

NOTE 14 Leases

On January 1, 2019, we adopted Accounting Standards Codification Topic 842, “Leases” (“ASC 842”). This pronouncement requires lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. We adopted this pronouncement utilizing the transition practical expedient which eliminates the requirement that the new lease standard be applied to comparative periods presented in the year of adoption.

As part of our adoption, we elected to utilize the package of practical expedients permitted under the new standard, which allowed us to not reassess: (a) whether an existing contract is or contains a lease, (b) the classification for existing leases and (c) initial direct costs. Further, as permitted by the standard, we made an accounting policy election not to record right-of-use assets or lease liabilities for leases with an initial term of 12 months or less. Instead, consistent with previous accounting guidance, we will recognize payments for such leases in the statement of operations on a straight-line basis over the lease term.

We lease real estate, vehicles and equipment under various operating and 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.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 14 Leases - (Continued)

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. As permitted by ASC 842, we have elected to account for these non-lease components together with the associated lease component. This election has been made 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.

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.

Lease Position as of September 30, 2019

The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of September 30, 2019 (in thousands):



	Classification on the Consolidated Balance Sheet	September 30, 2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	232,996
Finance lease assets	Property, plant and equipment, net	9,894
Total lease assets		$	242,890

Liabilities
Current
Operating	Operating lease liabilities, current	$	51,632
Finance	Current maturities of long-term debt and finance lease liabilities	4,192
Noncurrent
Operating	Operating lease liabilities, long-term	193,502
Finance	Long-term debt and finance lease liabilities	5,788
Total lease liabilities		$	255,114

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 14 Leases - (Continued)

Lease Costs

The following table presents information related to lease expense for the nine months ended September 30, 2019 (in thousands):



	For the nine months ended September 30, 2019
Finance lease expense:
Amortization expense	$	3,396
Interest expense	325
Operating lease expense	49,408
Short-term lease expense	108,930
Variable lease expense	3,358
Total lease expense	$	165,417

Lease Term and Discount Rate

The following table presents certain information related to lease terms and discount rates for leases as of September 30, 2019:



	September 30, 2019
Weighted-average remaining lease term:
Operating leases	6.6 years
Finance leases	3.0 years
Weighed-average discount rate:
Operating leases	4.17	%
Finance leases	4.16	%

Other Information

The following table presents supplemental cash flow information related to leases for the nine months ended September 30, 2019 (in thousands):



	For the nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases	$	48,966
Operating cash flows used for finance leases	$	325
Financing cash flows used for finance leases	$	3,357
Right-of-use assets obtained in exchange for new operating lease liabilities	$	57,400
Right-of-use assets obtained in exchange for new finance lease liabilities	$	4,471

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 14 Leases - (Continued)

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 September 30, 2019 (in thousands):



	Operating Leases			Finance Leases
October 1, 2019 to September 30, 2020	$	60,630		$	4,507
October 1, 2020 to September 30, 2021	49,507			3,077
October 1, 2021 to September 30, 2022	40,141			1,857
October 1, 2022 to September 30, 2023	33,471			838
October 1, 2023 to September 30, 2024	24,566			164
Thereafter	73,298			142
Total minimum lease payments	281,613			10,585
Less: Amount of lease payments representing interest	(36,479		)	(605		)
Present value of future minimum lease payments	$	245,134		$	9,980


Current portion of lease liabilities	$	51,632		$	4,192
Noncurrent portion of lease liabilities	193,502			5,788
Present value of future minimum lease payments	$	245,134		$	9,980

NOTE 15 Segment Information

Our reportable segments reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States industrial services segment due to changes in our internal reporting structure.

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; roadway and transit lighting; and fiber optic lines); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation; fire protection; plumbing, process and high-purity piping; 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 maintenance and services, including reception, security and catering services; outage services to utilities and industrial plants; military base operations support services; mobile mechanical maintenance and services; floor care and janitorial services; landscaping, lot sweeping and snow removal; facilities management; 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, including those for refineries and petrochemical plants, including on-site repairs, maintenance and service of heat exchangers, towers, vessels and piping; design, manufacturing, repair and hydro blast cleaning of shell and tube heat exchangers and related equipment; refinery turnaround planning and engineering services; specialty welding services; overhaul and maintenance of critical process units in refineries and petrochemical plants; and specialty technical services for refineries and petrochemical plants.

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 15 Segment Information - (Continued)

The following tables present information about industry segments and geographic areas for the three and nine months ended September 30, 2019 and 2018 (in thousands):



	For the three months ended September 30,
	2019			2018
Revenues from unrelated entities:
United States electrical construction and facilities services	$	554,637		$	485,974
United States mechanical construction and facilities services	869,188			759,495
United States building services	532,122			473,701
United States industrial services	234,166			227,313
Total United States operations	2,190,113			1,946,483
United Kingdom building services	97,628			100,566
Total worldwide operations	$	2,287,741		$	2,047,049

Total revenues:
United States electrical construction and facilities services	$	556,088		$	486,642
United States mechanical construction and facilities services	877,571			770,617
United States building services	550,002			490,624
United States industrial services	247,258			227,487
Less intersegment revenues	(40,806		)	(28,887		)
Total United States operations	2,190,113			1,946,483
United Kingdom building services	97,628			100,566
Total worldwide operations	$	2,287,741		$	2,047,049



	For the nine months ended September 30,
	2019			2018
Revenues from unrelated entities:
United States electrical construction and facilities services	$	1,652,109		$	1,420,268
United States mechanical construction and facilities services	2,444,683			2,168,127
United States building services	1,567,899			1,389,486
United States industrial services	788,271			610,479
Total United States operations	6,452,962			5,588,360
United Kingdom building services	317,709			312,963
Total worldwide operations	$	6,770,671		$	5,901,323

Total revenues:
United States electrical construction and facilities services	$	1,655,147		$	1,425,190
United States mechanical construction and facilities services	2,465,287			2,195,951
United States building services	1,622,509			1,437,498
United States industrial services	809,510			611,947
Less intersegment revenues	(99,491		)	(82,226		)
Total United States operations	6,452,962			5,588,360
United Kingdom building services	317,709			312,963
Total worldwide operations	$	6,770,671		$	5,901,323

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 15 Segment Information - (Continued)



	For the three months ended September 30,
	2019			2018
Operating income (loss):
United States electrical construction and facilities services	$	33,630		$	34,473
United States mechanical construction and facilities services	61,213			59,236
United States building services	35,051			29,315
United States industrial services	5,561			7,637
Total United States operations	135,455			130,661
United Kingdom building services	4,754			4,457
Corporate administration	(24,341		)	(23,113		)
Restructuring expenses	(119		)	(229		)
Total worldwide operations	115,749			111,776
Other corporate items:
Net periodic pension (cost) income	381			615
Interest expense, net	(2,678		)	(2,736		)
Income from continuing operations before income taxes	$	113,452		$	109,655



	For the nine months ended September 30,
	2019			2018
Operating income (loss):
United States electrical construction and facilities services	$	120,380		$	106,309
United States mechanical construction and facilities services	156,152			156,273
United States building services	90,535			68,822
United States industrial services	31,209			12,312
Total United States operations	398,276			343,716
United Kingdom building services	14,371			12,828
Corporate administration	(74,062		)	(65,508		)
Restructuring expenses	(567		)	(693		)
Impairment loss on identifiable intangible assets	—			(907		)
Total worldwide operations	338,018			289,436
Other corporate items:
Net periodic pension (cost) income	1,187			2,069
Interest expense, net	(8,732		)	(8,011		)
Income from continuing operations before income taxes	$	330,473		$	283,494

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EMCOR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 15 Segment Information - (Continued)



	September 30, 2019		December 31, 2018
Total assets:
United States electrical construction and facilities services	$	820,229	$	702,112
United States mechanical construction and facilities services	1,228,920		1,080,829
United States building services	984,514		846,221
United States industrial services	872,115		864,622
Total United States operations	3,905,778		3,493,784
United Kingdom building services	163,069		146,379
Corporate administration	463,874		448,644
Total worldwide operations	$	4,532,721	$	4,088,807

NOTE 16 Subsequent Event

On October 4, 2019, we entered into a definitive agreement to acquire Batchelor & Kimball, Inc. (“BKI”) in an all-cash transaction. BKI is a leading full service provider of mechanical construction and maintenance services in the South and Southeast regions of the United States, and its results will be included within our United States mechanical construction and facilities services segment. The transaction is expected to close by the end of 2019, subject to customary closing conditions and regulatory approvals.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 80 operating subsidiaries and joint venture entities. Our offices are located in the United States and the United Kingdom.

Operating Segments

Overview

The following table presents selected financial data for the three months ended September 30, 2019 and 2018 (in thousands, except percentages and per share data):



	For the three months ended September 30,
	2019			2018
Revenues	$	2,287,741		$	2,047,049
Revenues increase from prior year	11.8		%	8.5		%
Operating income	$	115,749		$	111,776
Operating income as a percentage of revenues	5.1		%	5.5		%
Net income attributable to EMCOR Group, Inc.	$	81,834		$	79,373
Diluted earnings per common share from continuing operations	$	1.45		$	1.36

The results for the three months ended September 30, 2019 set new company records for a third quarter in terms of revenues, operating income, net income attributable to EMCOR Group, Inc. and diluted earnings per common share from continuing operations. Revenues for the third quarter of 2019 increased by 11.8% from $2.05 billion for the three months ended September 30, 2018 to $2.29 billion for the three months ended September 30, 2019. Operating income for the three months ended September 30, 2019 of $115.7 million increased by $4.0 million compared to operating income of $111.8 million for the three months ended September 30, 2018.

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The increase in revenues for the 2019 third quarter was primarily attributable to revenue growth within all of our reportable segments, except for our United Kingdom building services segment as the results of such segment were negatively impacted by the effect of unfavorable exchange rates for the British pound versus the United States dollar.

The overall increase in operating income for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was primarily a result of increased operating income from our United States mechanical construction and facilities services segment and our United States building services segment, partially offset by a decrease in operating income from our United States electrical construction and facilities services segment and our United States industrial services segment.

Operating margin (operating income as a percentage of revenues) for the third quarter of 2019 was 5.1% compared to 5.5% for the third quarter of 2018. The overall decrease in operating margin was primarily due to a decrease in operating margin within our domestic construction segments, partially as a result of a change in revenue mix compared to the prior year.

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.

During 2019, we acquired a company which provides electrical contracting services in central Iowa and a company which provides mechanical contracting services in south-central and eastern Texas. The results of operations for these companies have been included within our United States electrical construction and facilities services segment and our United States mechanical construction and facilities services segment, respectively. In addition, within our United States building services segment, we acquired three companies. One such company provides mobile mechanical services in the Southern region of the United States, while the remaining two companies, the results of which were de minimis, provide building automation and controls solutions within the Western region of the United States.

We acquired four companies in calendar year 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 its results have been included in our United States electrical construction and facilities services segment.

Companies acquired in 2019 and 2018 generated incremental revenues of $75.6 million and incremental operating income of $4.8 million, inclusive of $1.7 million of amortization expense associated with identifiable intangible assets, for the three months ended September 30, 2019.

Results of Operations

Revenues

The following table presents our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages):



	For the three months ended September 30,
	2019		% of Total		2018		% of Total
Revenues:
United States electrical construction and facilities services	$	554,637	24	%	$	485,974	24	%
United States mechanical construction and facilities services	869,188		38	%	759,495		37	%
United States building services	532,122		23	%	473,701		23	%
United States industrial services	234,166		10	%	227,313		11	%
Total United States operations	2,190,113		96	%	1,946,483		95	%
United Kingdom building services	97,628		4	%	100,566		5	%
Total worldwide operations	$	2,287,741	100	%	$	2,047,049	100	%

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	For the nine months ended September 30,
	2019		% of Total		2018		% of Total
Revenues:
United States electrical construction and facilities services	$	1,652,109	24	%	$	1,420,268	24	%
United States mechanical construction and facilities services	2,444,683		36	%	2,168,127		37	%
United States building services	1,567,899		23	%	1,389,486		24	%
United States industrial services	788,271		12	%	610,479		10	%
Total United States operations	6,452,962		95	%	5,588,360		95	%
United Kingdom building services	317,709		5	%	312,963		5	%
Total worldwide operations	$	6,770,671	100	%	$	5,901,323	100	%

As described below in more detail, our revenues for the three months ended September 30, 2019 increased to $2.29 billion compared to $2.05 billion for the three months ended September 30, 2018, and our revenues for the nine months ended September 30, 2019 increased to $6.77 billion compared to $5.90 billion for the nine months ended September 30, 2018. The increase in revenues for both periods was attributable to increased revenues from all of our reportable segments except, in the case of the three months ended September 30, 2019, our United Kingdom building services segment as such segment’s results were negatively impacted by the effect of unfavorable exchange rates for the British pound versus the United States dollar. 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 $75.6 million and $196.7 million for the three and nine months ended September 30, 2019, respectively.

Revenues of our United States electrical construction and facilities services segment were $554.6 million and $1,652.1 million for the three and nine months ended September 30, 2019, respectively, compared to revenues of $486.0 million and $1,420.3 million for the three and nine months ended September 30, 2018, respectively. The increase in revenues for the three and nine months ended September 30, 2019 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 market sector. In addition, the results for the three and nine months ended September 30, 2019 included $43.8 million and $106.7 million, respectively, 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 construction projects within the transportation, healthcare, and hospitality market sectors.

Our United States mechanical construction and facilities services segment revenues for the three months ended September 30, 2019 were $869.2 million, a $109.7 million increase compared to revenues of $759.5 million for the three months ended September 30, 2018. Revenues of this segment for the nine months ended September 30, 2019 were $2,444.7 million, a $276.6 million increase compared to revenues of $2,168.1 million for the nine months ended September 30, 2018. The increase in revenues for the three and nine months ended September 30, 2019 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 new contract awards, including certain food processing construction projects, (b) the commercial market sector, primarily as a result of certain telecommunication and technology construction projects currently in process, and (c) the healthcare, institutional, and transportation market sectors due to increased project activity. In addition, the results for the three and nine months ended September 30, 2019 included $4.7 million of incremental revenues generated by a company acquired in 2019. These increases were partially offset by decreased revenues within the hospitality market sector as a result of the completion or substantial completion of certain large projects.

Revenues of our United States building services segment were $532.1 million and $1,567.9 million for the three and nine months ended September 30, 2019, respectively, compared to revenues of $473.7 million and $1,389.5 million for the three and nine months ended September 30, 2018, respectively. The increase in revenues for both periods was due to: (a) greater project, controls, and service repair and maintenance activities within our mobile mechanical services operations and (b) 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. In addition, the increase in revenues for the nine months ended September 30, 2019 was partially attributable to increased large project activity within our energy services operations. The results for the three and nine months ended September 30, 2019 included $27.1 million and $85.3 million, respectively, of incremental revenues generated by companies acquired in 2019 and 2018 within our mobile mechanical services operations. These increases were partially offset by a decrease in revenues due to the loss of certain contracts not renewed pursuant to rebid within our government site-based services operations.

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Revenues of our United States industrial services segment for the three months ended September 30, 2019 were $234.2 million, a $6.9 million increase compared to revenues of $227.3 million for the three months ended September 30, 2018. Revenues for the nine months ended September 30, 2019 were $788.3 million, a $177.8 million increase compared to revenues of $610.5 million for the nine months ended September 30, 2018. The increase in revenues for both periods was due to an increase in revenues from our field services operations as a result of increased maintenance and capital project activity. In addition, the results for the nine months ended September 30, 2019 benefited from a more normalized demand pattern compared to the prior year, 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 during the first half of 2018. The increased revenues for the three months ended September 30, 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 for the three months ended September 30, 2019 were $97.6 million compared to revenues for the three months ended September 30, 2018 of $100.6 million. Revenues of this segment for the nine months ended September 30, 2019 were $317.7 million compared to revenues for the nine months ended September 30, 2018 of $313.0 million. The decrease in revenues for the three months ended September 30, 2019 was attributable to the effects of unfavorable exchange rates for the British pound versus the United States dollar, which negatively impacted revenues for the third quarter of 2019 by $5.6 million. The increase in revenues for the nine months ended September 30, 2019 was primarily the result of: (a) new contract awards within the commercial market sector 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 nine months ended September 30, 2019 by $19.6 million.

Cost of sales and Gross profit

The following table presents our cost of sales, gross profit (revenues less cost of sales) and gross profit margin (gross profit as a percentage of revenues) (in thousands, except for percentages):



	For the three months ended September 30,						For the nine months ended September 30,
	2019			2018			2019			2018
Cost of sales	$	1,951,754		$	1,737,710		$	5,779,550		$	5,032,021
Gross profit	$	335,987		$	309,339		$	991,121		$	869,302
Gross profit, as a percentage of revenues	14.7		%	15.1		%	14.6		%	14.7		%

Our gross profit increased by $26.6 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, and our gross profit increased by $121.8 million for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. Our gross profit margin was 14.7% and 14.6% for the three and nine months ended September 30, 2019, respectively, compared to gross profit margin of 15.1% and 14.7% for the three and nine months ended September 30, 2018, respectively. The increase in gross profit for the three and nine months ended September 30, 2019 was the result of an increase in gross profit from all of our reportable segments except, in the case of the three months ended September 30, 2019, our United States industrial services segment. The increased gross profit within each such segment was partially attributable to an increase in revenues during the respective period. The decrease in gross profit margin for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 was predominantly due to lower gross profit margins within our domestic construction segments, as well as our United States industrial services segment, partially offset by improved gross profit margins within both our United States and United Kingdom building services segments. Gross profit and gross profit margin for the three months ended September 30, 2018 were favorably impacted by the final settlement of contract value for two projects within our United States mechanical construction and facilities services segment which were completed in prior periods. Such settlements resulted in a 0.2% favorable impact on the Company’s consolidated gross profit margin for the third quarter of 2018.

Selling, general and administrative expenses

The following table presents our selling, general and administrative expenses and SG&A margin (selling, general and administrative expenses as a percentage of revenues) (in thousands, except for percentages):



	For the three months ended September 30,						For the nine months ended September 30,
	2019			2018			2019			2018
Selling, general and administrative expenses	$	220,119		$	197,334		$	652,536		$	578,266
Selling, general and administrative expenses, as a percentage of revenues	9.6		%	9.6		%	9.6		%	9.8		%

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Our selling, general and administrative expenses for the three months ended September 30, 2019 increased by $22.8 million to $220.1 million compared to $197.3 million for the three months ended September 30, 2018. Selling, general and administrative expenses for the nine months ended September 30, 2019 increased by $74.3 million to $652.5 million compared to $578.3 million for the nine months ended September 30, 2018. The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2019 included $9.7 million and $26.5 million, respectively, of incremental expenses directly related to companies acquired in 2019 and 2018, including amortization expense attributable to identifiable intangible assets of $0.8 million and $2.3 million, respectively. In addition to the impact of acquisitions, selling, general and administrative expenses for both the three and nine month periods increased due to: (a) an increase in salaries and related employment costs, partially as a result of an increase in headcount due to higher revenues than in the same prior year period, (b) an increase in information technology costs related to certain initiatives currently in process, and (c) an increase in the provision for doubtful accounts. Selling, general and administrative expenses for the nine months ended September 30, 2019 were also impacted by an increase in incentive compensation expense as a result of higher projected annual operating results than in the same prior year period.

Selling, general and administrative expenses as a percentage of revenues was 9.6% for both the three and nine months ended September 30, 2019 compared to 9.6% and 9.8% for the three and nine months ended September 30, 2018, respectively. The decrease in SG&A margin for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to an increase in revenues without commensurate increases in our overhead cost structure.

Restructuring expenses

Operating income

The following table presents our operating income (loss) and operating income (loss) as a percentage of segment revenues from unrelated entities (in thousands, except for percentages):



	For the three months ended September 30,
	2019			% of Segment Revenues		2018			% of Segment Revenues
Operating income (loss):
United States electrical construction and facilities services	$	33,630		6.1	%	$	34,473		7.1	%
United States mechanical construction and facilities services	61,213			7.0	%	59,236			7.8	%
United States building services	35,051			6.6	%	29,315			6.2	%
United States industrial services	5,561			2.4	%	7,637			3.4	%
Total United States operations	135,455			6.2	%	130,661			6.7	%
United Kingdom building services	4,754			4.9	%	4,457			4.4	%
Corporate administration	(24,341		)	—		(23,113		)	—
Restructuring expenses	(119		)	—		(229		)	—
Total worldwide operations	115,749			5.1	%	111,776			5.5	%
Other corporate items:
Net periodic pension (cost) income	381					615
Interest expense, net	(2,678		)			(2,736		)
Income from continuing operations before income taxes	$	113,452				$	109,655

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	For the nine months ended September 30,
	2019			% of Segment Revenues		2018			% of Segment Revenues
Operating income (loss):
United States electrical construction and facilities services	$	120,380		7.3	%	$	106,309		7.5	%
United States mechanical construction and facilities services	156,152			6.4	%	156,273			7.2	%
United States building services	90,535			5.8	%	68,822			5.0	%
United States industrial services	31,209			4.0	%	12,312			2.0	%
Total United States operations	398,276			6.2	%	343,716			6.2	%
United Kingdom building services	14,371			4.5	%	12,828			4.1	%
Corporate administration	(74,062		)	—		(65,508		)	—
Restructuring expenses	(567		)	—		(693		)	—
Impairment on identifiable intangible assets	—			—		(907		)	—
Total worldwide operations	338,018			5.0	%	289,436			4.9	%
Other corporate items:
Net periodic pension (cost) income	1,187					2,069
Interest expense, net	(8,732		)			(8,011		)
Income from continuing operations before income taxes	$	330,473				$	283,494

As described below in more detail, operating income was $115.7 million and $338.0 million for the three and nine months ended September 30, 2019, respectively, compared to $111.8 million and $289.4 million for the three and nine months ended September 30, 2018, respectively. The increase in operating income for the three and nine months ended September 30, 2019 was the result of an increase in gross profit from all of our reportable segments except, in the case of the three months ended September 30, 2019, our United States industrial services segment. Such increased gross profit was partially offset by an increase in selling, general, and administrative expenses for each 2019 period. Operating margin was 5.1% and 5.0% for the three and nine months ended September 30, 2019, respectively, compared to 5.5% and 4.9% for the three and nine months ended September 30, 2018, respectively. Operating margin for the three months ended September 30, 2018 was favorably impacted by the final settlement of contract value for two projects within our United States mechanical construction and facilities services segment which were completed in prior periods. Such settlements resulted in a 0.3% favorable impact on the Company’s consolidated operating margin for the third quarter of 2018.

Operating income of our United States electrical construction and facilities services segment for the three months ended September 30, 2019 was $33.6 million, or 6.1% of revenues, compared to operating income of $34.5 million, or 7.1% of revenues, for the three months ended September 30, 2018. Operating income for the nine months ended September 30, 2019 was $120.4 million, or 7.3% of revenues, compared to operating income of $106.3 million, or 7.5% of revenues, for the nine months ended September 30, 2018. The $14.1 million increase in operating income for the nine months ended September 30, 2019 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 construction projects. Additionally, companies acquired in 2019 and 2018 contributed incremental operating income of $1.0 million and $3.2 million, inclusive of $0.4 million and $1.5 million of amortization expense associated with identifiable intangible assets, for the three and nine months ended September 30, 2019, respectively. The decrease in operating margin for the three months ended September 30, 2019 was attributable to: (a) a decrease in gross profit margin, partially as a result of the completion or substantial completion of the aforementioned transportation construction projects which favorably impacted the results of the prior year, and (b) an increase in the ratio of selling, general, and administrative expenses to revenues. The decrease in operating margin for the nine months ended September 30, 2019 was attributable to an increase in the ratio of selling, general and administrative expenses to revenues, partially as a result of an increase in the provision for doubtful accounts.

Our United States mechanical construction and facilities services segment operating income for the three and nine months ended September 30, 2019 was $61.2 million and $156.2 million, respectively, compared to operating income of $59.2 million and $156.3 million for the three and nine months ended September 30, 2018, respectively. A company acquired in 2019 contributed incremental operating income of less than $0.1 million, inclusive of $0.2 million of amortization expense associated with identifiable intangible assets, for the three and nine months ended September 30, 2019. The slight increase in operating income for the three months ended September 30, 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 hospitality and manufacturing market sectors. Operating income within this segment for the nine months ended September 30, 2019 was relatively consistent with the nine months ended September 30, 2018. Increased gross profit within the commercial and institutional market

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sectors was offset by decreased gross profit from manufacturing, hospitality, and short duration project activities. Operating margins within this segment for the three and nine months ended September 30, 2019 were 7.0% and 6.4%, respectively, compared to operating margins for the three and nine months ended September 30, 2018 of 7.8% and 7.2%, respectively. The decrease in operating margin for both 2019 periods was partially attributable to a decrease in gross profit margin, primarily within the manufacturing market sector, as the mix of work in the current year included a greater number of projects which are in the earlier stages of completion and typically carry lower gross profit margins. For the three months ended September 30, 2018, operating margin of this segment was favorably impacted by 0.6% as a result of the final settlement of contract value for two projects which were completed in prior periods.

Operating income of our United States building services segment for the three months ended September 30, 2019 was $35.1 million, or 6.6% or revenues, compared to operating income for the three months ended September 30, 2018 of $29.3 million, or 6.2% of revenues. Operating income of this segment for the nine months ended September 30, 2019 was $90.5 million, or 5.8% of revenues, compared to operating income for the nine months ended September 30, 2018 of $68.8 million, or 5.0% of revenues. The increase in operating income for the three and nine months ended September 30, 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 for the nine months ended September 30, 2019 benefited from increased gross profit from: (a) our energy services operations, due to an increase in large project activity, and (b) our commercial site-based services operations, as a result of scope expansion on certain existing contracts. Companies acquired in 2019 and 2018 contributed incremental operating income of $3.8 million and $8.8 million, inclusive of $1.1 million and $3.9 million of amortization expense associated with identifiable intangible assets, for the three and nine months ended September 30, 2019, respectively. The increase in operating margin for both the three and nine month periods was attributable to an increase in gross profit margin, primarily from project, controls, and repair activities within our mobile mechanical services operations.

Our United States industrial services segment operating income for the three months ended September 30, 2019 was $5.6 million, or 2.4% of revenues, compared to operating income of $7.6 million, or 3.4% of revenues, for the three months ended September 30, 2018. Operating income of this segment for the nine months ended September 30, 2019 was $31.2 million, or 4.0% of revenues, compared to operating income of $12.3 million, or 2.0% of revenues, for the nine months ended September 30, 2018. The decrease in operating income for the quarter ended September 30, 2019 was primarily attributable to the mix of work within our field services operations which included a greater number of capital projects which carry relatively lower gross profit margins than our typical turnaround work. The $18.9 million increase in operating income for the nine months ended September 30, 2019 was primarily due to an increase in demand for our service offerings during the year as we experienced a more normalized demand pattern compared to the prior year. Additionally, the results for the nine months ended September 30, 2019 benefited from the recovery of $3.6 million associated with a legal settlement, which has been recorded as a reduction to selling, general and administrative expenses. The decrease in operating margin for the three months ended September 30, 2019 was attributable to a decrease in gross profit margin, partially as a result of the unfavorable mix of work described above. The increase in operating margin for the nine months ended September 30, 2019 was primarily attributable to a decrease in the ratio of selling, general and administrative expenses to revenues as a result of: (a) an increase in revenues without commensurate increases in this segment’s overhead cost structure and (b) the legal settlement referenced above.

Our United Kingdom building services segment operating income was $4.8 million for the quarter ended September 30, 2019 compared to operating income of $4.5 million for the quarter ended September 30, 2018. Operating income for the nine months ended September 30, 2019 was $14.4 million compared to operating income of $12.8 million for the nine months ended September 30, 2018. Operating margins within this segment for the three and nine months ended September 30, 2019 were 4.9% and 4.5%, respectively, compared to operating margins for the three and nine months ended September 30, 2018 of 4.4% and 4.1%, respectively. Operating income for both 2019 periods 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 $0.3 million and $0.9 million for the three and nine months ended September 30, 2019, respectively, related to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The increase in operating margin for the three and nine months ended September 30, 2019 was attributable to an increase in gross profit margin.

Our corporate administration operating loss for the three and nine months ended September 30, 2019 was $24.3 million and $74.1 million, respectively, compared to $23.1 million and $65.5 million for the three and nine months ended September 30, 2018, respectively. The increase in corporate administration expenses for both 2019 periods was primarily due to an increase in employment costs, such as incentive compensation and salaries, as well as an increase in professional fees as a result of certain information technology initiatives currently in process.

Net interest expense for the three months ended September 30, 2019 and 2018 was $2.7 million. Net interest expense for the nine months ended September 30, 2019 and 2018 was $8.7 million and $8.0 million, respectively. The increase in net interest expense for the nine month period was due to: (a) the impact of higher interest rates on interest expense, partially offset by the

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impact of decreased average outstanding borrowings, and (b) reduced interest income as a result of lower average daily cash balances during the first half of 2019.

For the three months ended September 30, 2019 and 2018, our income tax provision from continuing operations was $31.6 million and $29.7 million, respectively, based on an effective income tax rate, before discrete items and less amounts attributable to noncontrolling interests, of 27.9% and 27.7%, respectively. The actual income tax rate on income from continuing operations, less amounts attributable to noncontrolling interests, for the three months ended September 30, 2019 and 2018, inclusive of discrete items, was 27.9% and 27.1%, respectively. For the nine months ended September 30, 2019 and 2018, our income tax provision from continuing operations was $92.3 million and $76.9 million, respectively, based on an effective income tax rate, before discrete items and less amounts attributable to noncontrolling interests, of 28.1% and 27.7%, respectively. The actual income tax rate on income from continuing operations, less amounts attributable to noncontrolling interests, for the nine months ended September 30, 2019 and 2018, inclusive of discrete items, was 27.9% and 27.1%, respectively. The increase in the 2019 income tax provision was primarily due to increased income from continuing operations. The increase in the actual income tax rate on income from continuing operations for both the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018, was primarily due to the continued application of the Tax Cuts and Jobs Act, including the implementation of interpretative guidance issued regarding certain permanent differences and other non-deductible expenses.

Discontinued operations

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 total of remaining performance obligations (in thousands, except for percentages):



	September 30, 2019		% of Total		December 31, 2018		% of Total		September 30, 2018		% of Total
Remaining performance obligations:
United States electrical construction and facilities services	$	1,095,254	27	%	$	1,085,571	27	%	$	1,181,620	30	%
United States mechanical construction and facilities services	2,190,556		54	%	2,226,183		57	%	2,131,486		54	%
United States building services	544,913		14	%	435,074		11	%	434,386		11	%
United States industrial services	83,478		2	%	86,930		2	%	95,444		2	%
Total United States operations	3,914,201		97	%	3,833,758		97	%	3,842,936		97	%
United Kingdom building services	120,887		3	%	130,524		3	%	126,732		3	%
Total worldwide operations	$	4,035,088	100	%	$	3,964,282	100	%	$	3,969,668	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 total transaction price can be made.

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Our remaining performance obligations at September 30, 2019 were $4.04 billion compared to $3.96 billion at December 31, 2018 and $3.97 billion at September 30, 2018. The increase in remaining performance obligations at September 30, 2019 compared to December 31, 2018 was attributable to an increase in remaining performance obligations within our United States electrical construction and facilities services segment and our United States building services segment.

Liquidity and Capital Resources

The following table presents our net cash provided by (used in) operating activities, investing activities and financing activities (in thousands):



	For the nine months ended September 30,
	2019			2018
Net cash provided by operating activities	$	176,921		$	65,892
Net cash used in investing activities	$	(114,957	)	$	(56,871	)
Net cash used in financing activities	$	(56,324	)	$	(120,083	)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	$	(2,047	)	$	(1,985	)

Our consolidated cash balance, including cash equivalents and restricted cash, increased by approximately $3.6 million from $366.2 million at December 31, 2018 to $369.8 million at September 30, 2019. Net cash provided by operating activities for the nine months ended September 30, 2019 was $176.9 million compared to $65.9 million for the nine months ended September 30, 2018. The increase in cash provided by operating activities was primarily due to: (a) a $32.6 million increase in net income including noncontrolling interests and (b) the timing of cash receipts from our customers, including payments of advanced billings on our long-term construction contracts. Net cash used in investing activities was $115.0 million for the nine months ended September 30, 2019 compared to $56.9 million for the nine months ended September 30, 2018. The increase in net cash used in investing activities was primarily due to an increase in payments for acquisitions of businesses and purchases of property, plant and equipment. Net cash used in financing activities for the nine months ended September 30, 2019 decreased by approximately $63.8 million compared to the nine months ended September 30, 2018, primarily as a result of a $90.8 million decrease in funds used for the repurchase of our common stock, partially offset by a $25.0 million repayment of our revolving credit facility during the 2019 period. Cash flows from discontinued operations were immaterial and are not expected to significantly affect future liquidity.

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 3.04%) ⁽¹⁾	$	272.3	$	23.0	$	249.3	$	—	$	—
Finance leases	10.6		4.5		4.9		1.0		0.2
Operating leases	281.6		60.6		89.7		58.0		73.3
Open purchase obligations ⁽²⁾	1,238.5		980.8		215.7		42.0		—
Other long-term obligations, including current portion ⁽³⁾	394.8		70.7		315.1		9.0		—
Total Contractual Obligations	$	2,197.8	$	1,139.6	$	874.7	$	110.0	$	73.5

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			Amount of Commitment Expiration by Period
Other Commercial Commitments	Total Committed		Less than 1 year		1-3 years		3-5 years		After 5 years
Letters of credit	$	109.0	$	109.0	$	—	$	—	$	—

_________

(1)

On August 3, 2016, we entered into 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”). As of September 30, 2019, the amount outstanding under the 2016 Term Loan was $258.2 million. There were no borrowings outstanding under the 2016 Revolving Credit Facility as of September 30, 2019.


(2)	Represents open purchase orders for material and subcontracting costs related to construction and services contracts. These purchase orders are not reflected in EMCOR’s 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 liabilities 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. 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.

The terms of our construction contracts frequently require that we obtain from surety companies (“Surety Companies”) and provide to our customers payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure our payment and performance obligations under such contracts, and we have agreed to indemnify the Surety Companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. In addition, at the request of labor unions representing certain of our employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts and, accordingly, our bonding requirements typically increase as the amount of public sector work increases. As of September 30, 2019, based on the percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, assuming

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defaults on all our then existing contractual obligations, was approximately $1.2 billion. Surety Bonds are issued by Surety Companies in return for premiums, which vary depending on the size and type of bond.

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 (i) 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, (ii) increase our activities in our business segments that rarely require Surety Bonds, such as our building and industrial services segments, and/or (iii) 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.

We are a party to lawsuits and other proceedings in which other parties seek to recover amounts from 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.

On September 26, 2011, our Board of Directors (the “Board”) authorized us to repurchase up to $100.0 million of our outstanding common stock. Subsequently, the Board has from time to time increased the amount of our common stock that we may repurchase. Since the inception of the repurchase program, the Board has authorized us to repurchase up to $950 million of our outstanding common stock. No shares of our common stock were repurchased during the nine months ended September 30, 2019. Since the inception of the repurchase program through September 30, 2019, we have repurchased approximately 15.9 million shares of our common stock for approximately $791.5 million. As of September 30, 2019, there remained authorization for us to repurchase approximately $158.5 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 2016 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 currently pay a regular quarterly dividend of $0.08 per share. Our 2016 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 $0.08 per share for the foreseeable future. The payment of dividends has been and will be funded from our operations.

Our primary source of liquidity has been, and is expected to continue to be, cash generated by operating activities. We also maintain our 2016 Revolving Credit Facility that may be utilized, among other things, to meet short-term liquidity needs in the event cash generated by operating activities is insufficient or to enable us to participate in joint ventures or to make acquisitions that may require access to cash on short notice or for any other reason. Negative macroeconomic trends may have an adverse effect on liquidity. 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. Short-term liquidity is also impacted by the type and length of construction contracts in place and large turnaround activities in our United States industrial services segment that are billed in arrears pursuant to contractual terms that are standard within the industry. Performance of long duration contracts typically requires greater amounts of working capital. 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.

Long-term liquidity requirements can be expected to be met initially through cash generated from operating activities and our 2016 Revolving Credit Facility. Based upon our current credit ratings and financial position, we can reasonably expect to be able to incur long-term debt to fund acquisitions. Over the long term, our primary revenue risk factor continues to be the level of demand for non-residential construction services and for building and industrial services, which is influenced by macroeconomic trends including interest rates and governmental economic policy. In addition, our ability to perform work is critical to meeting long-term liquidity requirements.

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We believe that our current cash balances and our borrowing capacity available under our 2016 Revolving Credit Facility or other forms of financing available to us through borrowings, combined with cash expected to be generated from operations, will be sufficient to provide short-term and foreseeable long-term liquidity and meet our expected capital expenditure requirements.

Certain Insurance Matters

As of September 30, 2019 and December 31, 2018, we utilized approximately $108.9 million of letters of credit obtained under our 2016 Revolving Credit Facility as collateral for our insurance obligations.

New Accounting Pronouncements

We review new accounting standards to determine the expected financial impact, if any, that the adoption of such standards will have. See Note 2 - New Accounting Pronouncements of the notes to consolidated financial statements included in Item 1. Financial Statements 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 significant 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 of our annual report on Form 10-K for the year ended December 31, 2018. We believe that some of the more critical judgment areas in the application of accounting policies that affect our financial condition and results of operations are the impact of changes in the estimates and judgments pertaining to: (a) revenue recognition from contracts with customers; (b) collectibility or valuation of accounts receivable; (c) insurance liabilities; (d) income taxes; and (e) goodwill and identifiable intangible assets.

Revenue Recognition from Contracts with Customers

We believe our most critical accounting policy is revenue recognition in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). In accordance with ASC 606, 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.

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See Note 3 - Revenue from Contracts with Customers of the notes to consolidated financial statements included in Item 1. Financial Statements for further disclosure regarding revenue recognition.

Accounts Receivable

Accounts receivable are recognized in the period we deliver goods or provide services to our customers or when our right to consideration is unconditional. We are required to estimate the collectibility of accounts receivable. A considerable amount of judgment is required in assessing the likelihood of realization of receivables. Relevant assessment factors include the creditworthiness of the customer, our prior collection history with the customer and related aging of the past due balances. At September 30, 2019 and December 31, 2018, our accounts receivable of $1,926.8 million and $1,773.6 million, respectively, were recorded net of allowances for doubtful accounts of $15.1 million and $15.4 million, respectively. Specific accounts receivable are evaluated when we believe a customer may not be able to meet its financial obligations due to the deterioration of its financial condition or its credit ratings. The allowance for doubtful accounts requirements are based on the best facts available and are re-evaluated and adjusted on a regular basis as additional information is received.

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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 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 $8.9 million at September 30, 2019 compared to December 31, 2018, partially as a result of higher revenues, 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 $17.1 million of additional expense for the nine months ended September 30, 2019.

Income Taxes

We had net deferred income tax liabilities at September 30, 2019 and December 31, 2018 of $70.4 million and $70.8 million, respectively, primarily resulting from differences between the carrying value and income tax basis of certain identifiable intangible assets and depreciable fixed assets, which will impact our taxable income in future periods. Included within these net deferred income tax liabilities are $103.2 million and $104.1 million of deferred income tax assets as of September 30, 2019 and December 31, 2018, respectively. A valuation allowance is required when it is more likely than not that all or a portion of a deferred income tax asset will not be realized. As of September 30, 2019 and December 31, 2018, the total valuation allowance on deferred income tax assets, primarily related to state net operating loss carryforwards, was approximately $3.8 million and $3.9 million, respectively.

Goodwill and Identifiable Intangible Assets

As of September 30, 2019, we had $1,019.6 million and $482.8 million, respectively, of goodwill and net identifiable intangible assets (primarily consisting of our contract backlog, developed technology/vendor network, customer relationships, non-competition agreements and trade names), arising out of the acquisition of companies. As of December 31, 2018, goodwill and net identifiable intangible assets were $990.9 million and $488.3 million, respectively. As of September 30, 2019, approximately 14.0% of our goodwill related to our United States electrical construction and facilities services segment, approximately 25.1% related to our United States mechanical construction and facilities services segment, approximately 28.3% related to our United States building services segment, and approximately 32.6% related to our United States industrial services segment. The changes to goodwill since December 31, 2018 were the result of acquisitions completed in 2019 and purchase price adjustments related to acquisitions completed in the fourth quarter of 2018. The determination of related estimated useful lives for identifiable intangible assets and whether those assets are impaired involves significant judgments based upon short and long-term projections of future performance. These forecasts reflect assumptions regarding the ability to successfully integrate acquired companies, as well as macroeconomic conditions. ASC Topic 350, “Intangibles – Goodwill and Other” (“ASC 350”) requires that goodwill and other identifiable intangible assets with indefinite useful lives not be amortized, but instead tested at least annually for impairment (which we test each October 1, absent any impairment indicators), and be written down if impaired. ASC 350 requires that goodwill be allocated to its respective reporting unit and that identifiable intangible assets with finite lives be amortized over their useful lives.

We test for impairment of our goodwill at the reporting unit level. Our reporting units are consistent with the reportable segments identified in Note 15, “Segment Information”, of the notes to consolidated financial statements. In assessing whether our goodwill is impaired, we compare the fair value of the reporting unit to the carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment loss 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. The fair value of each of our reporting units is generally determined using discounted estimated future cash flows; however, in certain circumstances, consideration is given to a market approach whereby fair value is measured based on a multiple of earnings.

As of the date of our latest impairment test (October 1, 2018), the carrying 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 were approximately $251.2 million, $398.8 million, $499.5 million and $657.5 million, respectively. 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

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and our United States industrial services segment exceeded their carrying values by approximately $1,203.0 million, $1,710.9 million, $628.2 million and $81.2 million, respectively. No impairment of our goodwill was recognized during the three and nine months ended September 30, 2019 and 2018.

The weighted average cost of capital used in our annual testing for impairment as of October 1, 2018 was 9.8%, 9.7% and 10.5% for our domestic construction segments, our United States building services segment and our United States industrial services segment, respectively. The perpetual growth rate used for our annual testing was 2.7% for all of our domestic segments. Unfavorable changes in these key assumptions may affect future testing results. For example, keeping all other assumptions constant, a 50 basis point increase in the weighted average costs 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 $91.7 million, $132.4 million, $71.2 million, and $46.4 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 $52.5 million, $74.1 million, $38.3 million, and $23.3 million, respectively.

We also test for the impairment of trade names that are not subject to amortization by calculating the fair value 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. No impairment of our indefinite-lived trade names was recognized during the three and nine months ended September 30, 2019 and 2018.

In addition, we review for the impairment of other identifiable intangible assets that are being amortized 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 future discounted cash flows. During the second quarter of 2018, we recorded a $0.9 million non-cash impairment charge associated with a finite-lived trade name within our United States industrial services segment. No additional impairment of our other identifiable intangible assets was recognized during the three and nine months ended September 30, 2019 and 2018.

We have certain businesses, particularly within our United States industrial services segment, whose results are highly impacted by the demand for some of our offerings within the industrial and oil and gas markets. Future performance of this segment, along with a continued evaluation of the conditions of its end user markets, will be important to ongoing impairment assessments. Should this segment’s actual results suffer a decline or expected future results be revised downward, the risk of goodwill impairment or impairment of other identifiable intangible assets would increase.

Our development of the present value of future cash flow projections used in impairment testing is based upon assumptions and estimates by management from a review of our operating results, business plans, anticipated growth rates and margins, and weighted average cost of capital, among other considerations. Those assumptions and estimates can change in future periods, and other factors used in assessing fair value are outside the control of management, such as interest rates. There can be no assurance that estimates and assumptions made for purposes of our goodwill and identifiable intangible asset impairment testing will prove to be accurate predictions of the future. If our assumptions regarding future business performance or anticipated growth rates and/or margins are not achieved, or there is a rise in interest rates, we may be required to record goodwill and/or identifiable intangible asset impairment charges in future periods.

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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We did not use any derivative financial instruments during the nine months ended September 30, 2019, including trading or speculating on changes in interest rates or commodity prices of materials used in our business.

We are exposed to market risk for changes in interest rates for borrowings under the 2016 Credit Agreement, which provides for a revolving credit facility and a term loan. Borrowings under the 2016 Credit Agreement bear interest at variable rates. As of September 30, 2019, there were no borrowings outstanding under the 2016 Revolving Credit Facility and the balance of the 2016 Term Loan was $258.2 million. This instrument bears interest at (1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2) United States dollar LIBOR (2.04% at September 30, 2019) 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 (5.00% at September 30, 2019), (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 September 30, 2019 was 3.04%. Fees for letters of credit issued under the 2016 Revolving Credit Facility range from 1.00% to 1.75% of the respective face amounts of outstanding letters of credit and are computed based on certain financial tests. Based on the $258.2 million borrowings outstanding under the 2016 Credit Agreement, if overall interest rates were to increase by 100 basis points, interest expense, net of income taxes, would increase by approximately $1.9 million in the next twelve months. Conversely, if overall interest rates were to decrease by 100 basis points, interest expense, net of income taxes, would decrease by approximately $1.9 million in the next twelve months. The 2016 Credit Agreement expires on August 3, 2021. There is no guarantee that we will be able to renew the 2016 Credit Agreement at its expiration.

It is expected that a number of banks currently reporting information used to set LIBOR will stop doing so after 2021, which could either cause LIBOR to stop publication or cause LIBOR to no longer be representative of the underlying market. We believe our exposure to market risk associated with the discontinuation of LIBOR is limited as our 2016 Credit Agreement expires prior to the end of 2021 and given that we are not exposed to any other material contracts that reference LIBOR.

We are exposed to construction market risk and its potential related impact on accounts receivable or contract assets on uncompleted contracts. The amounts recorded may be at risk if our customers’ ability to pay these obligations is negatively impacted by economic conditions. We continually monitor the creditworthiness of our customers and maintain on-going discussions with customers regarding contract status with respect to change orders and billing terms. Therefore, we believe we take appropriate action to manage market and other risks, but there is no assurance that we will be able to reasonably identify all risks with respect to the collectibility of these assets. See also the previous discussions of Revenue Recognition from Contracts with Customers and Accounts Receivable under the heading, “Application of Critical Accounting Policies” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Amounts invested in our foreign operations are translated into U.S. dollars at the exchange rates in effect at the end of the period. The resulting translation adjustments are recorded as accumulated other comprehensive (loss) income, a component of equity, in the Consolidated Balance Sheets. We believe the exposure to the effects that fluctuating foreign currencies may have on our consolidated results of operations is limited because our foreign operations primarily invoice customers and collect obligations in their respective local currencies. Additionally, expenses associated with these transactions are generally contracted and paid for in their same local currencies.

In addition, we are exposed to market risk of fluctuations in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in our construction, building services and industrial services operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our fleet of approximately 11,000 vehicles. While we believe we can increase our contract prices to adjust for some price increases in commodities, there can be no assurance that such price increases, if they were to occur, would be recoverable. Additionally, our fixed price contracts do not allow us to adjust our prices and, as a result, increases in material costs could reduce our profitability with respect to projects in progress.

ITEM 4. CONTROLS AND PROCEDURES.

Based on an evaluation of our disclosure controls and procedures (as required by Rule 13a-15(b) of the Securities Exchange Act of 1934), our Chairman, President and Chief Executive Officer, Anthony J. Guzzi, and our Executive Vice President, Chief Financial Officer and Treasurer, Mark A. Pompa, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchanges Act of 1934) are effective as of the end of the period covered by this report.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. – OTHER INFORMATION.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table summarizes repurchases of our common stock made by us during the quarter ended September 30, 2019:



Period	Total Number of Shares Purchased (1)	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet be Purchased Under the Plan or Programs
July 1, 2019 to July 31, 2019	—	—	—	$158,506,898
August 1, 2019 to August 31, 2019	—	—	—	$158,506,898
September 1, 2019 to September 30, 2019	—	—	—	$158,506,898
Total	—	—	—

(1)

On September 26, 2011, our Board of Directors (the “Board”) authorized us to repurchase up to $100.0 million of our outstanding common stock. Subsequently, the Board has from time to time increased the amount of our common stock that we may repurchase. Since the inception of the repurchase program, the Board has authorized us to repurchase up to $950.0 million of our outstanding common stock. As of September 30, 2019, there remained authorization for us to repurchase approximately $158.5 million of our shares. No shares have been repurchased by us since the program was announced other than pursuant to such program. The repurchase program has no expiration, 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 credit agreement, placing limitations on such repurchases.

ITEM 4. MINE SAFETY DISCLOSURES.

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this quarterly report.

ITEM 6. EXHIBITS.

For the list of exhibits, see the Exhibit Index immediately following the signature page hereof, which Exhibit Index is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: October 29, 2019



	EMCOR GROUP, INC.
	(Registrant)

BY:	/s/ ANTHONY J. GUZZI
	Anthony J. Guzzi
	Chairman, President and Chief Executive Officer (Principal Executive Officer)

BY:	/s/ MARK A. POMPA
	Mark A. Pompa
	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX



Exhibit No.	Description	Incorporated By Reference to or Filed Herewith, as Indicated Below

2(a)	Purchase and Sale Agreement, dated as of June 17, 2013 by and among Texas Turnaround LLC, a Delaware limited liability company, Altair Strickland Group, Inc., a Texas corporation, Rep Holdings LLC, a Texas limited liability company, ASG Key Employee LLC, a Texas limited liability company, Repcon Key Employee LLC, a Texas limited liability company, Gulfstar MBII, Ltd., a Texas limited partnership, The Trustee of the James T. Robinson and Diana J. Robinson 2010 Irrevocable Trust, The Trustee of the Steven Rothbauer 2012 Descendant’s Trust, The Co-Trustees of the Patia Strickland 2012 Descendant’s Trust, The Co-Trustees of the Carter Strickland 2012 Descendant’s Trust, and The Co-Trustees of the Walton 2012 Grandchildren’s Trust (collectively, “Sellers”) and EMCOR Group, Inc.	Exhibit 2.1 to EMCOR’s Report on Form 8-K (Date of Report June 17, 2013)
3(a-1)	Restated Certificate of Incorporation of EMCOR filed December 15, 1994	Exhibit 3(a-5) to EMCOR’s Registration Statement on Form 10 as originally filed March 17, 1995 (“Form 10”)
3(a-2)	Amendment dated November 28, 1995 to the Restated Certificate of Incorporation of EMCOR	Exhibit 3(a-2) to EMCOR’s Annual Report on Form 10-K for the year ended December 31, 1995 (“1995 Form10-K”)
3(a-3)	Amendment dated February 12, 1998 to the Restated Certificate of Incorporation of EMCOR	Exhibit 3(a-3) to EMCOR’s Annual Report on Form 10-K for the year ended December 31, 1997 (“1997 Form 10-K”)
3(a-4)	Amendment dated January 27, 2006 to the Restated Certificate of Incorporation of EMCOR	Exhibit 3(a-4) to EMCOR’s Annual Report on Form 10-K for the year ended December 31, 2005 (“2005 Form 10-K”)
3(a-5)	Amendment dated September 18, 2007 to the Restated Certificate of Incorporation of EMCOR	Exhibit A to EMCOR’s Proxy Statement dated August 17, 2007 for Special Meeting of Stockholders held September 18, 2007
3(b)	Amended and Restated By-Laws and Amendments thereto	Exhibit 3(b) to EMCOR’s Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K”)
4(a)	Fifth Amended and Restated Credit Agreement dated as of August 3, 2016 by and among EMCOR Group, Inc. and a subsidiary and Bank of Montreal, as Agent and the lenders listed on the signature pages thereof (the “Credit Agreement”)	Exhibit 4(a) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (“September 2016 Form 10-Q”)
4(b)	Fifth Amended and Restated Security Agreement dated as of August 3, 2016 among EMCOR, certain of its U.S. subsidiaries, and Bank of Montreal, as Agent	Exhibit 4(b) to the September 2016 Form 10-Q
4(c)	Fifth Amended and Restated Pledge Agreement dated as of August 3, 2016 among EMCOR, certain of its U.S. subsidiaries, and Bank of Montreal, as Agent	Exhibit 4(c) to the September 2016 Form 10-Q
4(d)	Fourth Amended and Restated Guaranty Agreement dated as of August 3, 2016 by certain of EMCOR’s U.S. subsidiaries in favor of Bank of Montreal, as Agent	Exhibit 4(d) to the September 2016 Form 10-Q

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EXHIBIT INDEX



Exhibit No.	Description	Incorporated By Reference to or Filed Herewith, as Indicated Below

10(a)	Form of Severance Agreement (“Severance Agreement”) between EMCOR and each of R. Kevin Matz and Mark A. Pompa	Exhibit 10.1 to the April 2005 Form 8-K
10(b)	Form of Amendment to Severance Agreement between EMCOR and each of R. Kevin Matz and Mark A. Pompa	Exhibit 10(c) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (“March 2007 Form 10-Q”)
10(c)	Letter Agreement dated October 12, 2004 between Anthony Guzzi and EMCOR (the “Guzzi Letter Agreement”)	Exhibit 10.1 to EMCOR’s Report on Form 8-K (Date of Report October 12, 2004)
10(d)	Form of Confidentiality Agreement between Anthony Guzzi and EMCOR	Exhibit C to the Guzzi Letter Agreement
10(e)	Form of Indemnification Agreement between EMCOR and each of its officers and directors	Exhibit F to the Guzzi Letter Agreement
10(f-1)	Severance Agreement (“Guzzi Severance Agreement”) dated October 25, 2004 between Anthony Guzzi and EMCOR	Exhibit D to the Guzzi Letter Agreement
10(f-2)	Amendment to Guzzi Severance Agreement	Exhibit 10(g-2) to the March 2007 Form 10-Q
10(g-1)	Continuity Agreement dated as of June 22, 1998 between R. Kevin Matz and EMCOR (“Matz Continuity Agreement”)	Exhibit 10(f) to the June 1998 Form 10-Q
10(g-2)	Amendment dated as of May 4, 1999 to Matz Continuity Agreement	Exhibit 10(m) to the June 1999 Form 10-Q
10(g-3)	Amendment dated as of January 1, 2002 to Matz Continuity Agreement	Exhibit 10(o-3) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (“March 2002 Form 10-Q”)
10(g-4)	Amendment dated as of March 1, 2007 to Matz Continuity Agreement	Exhibit 10(n-4) to the March 2007 Form 10-Q
10(h-1)	Continuity Agreement dated as of June 22, 1998 between Mark A. Pompa and EMCOR (“Pompa Continuity Agreement”)	Exhibit 10(g) to the June 1998 Form 10-Q
10(h-2)	Amendment dated as of May 4, 1999 to Pompa Continuity Agreement	Exhibit 10(n) to the June 1999 Form 10-Q
10(h-3)	Amendment dated as of January 1, 2002 to Pompa Continuity Agreement	Exhibit 10(p-3) to the March 2002 Form 10-Q
10(h-4)	Amendment dated as of March 1, 2007 to Pompa Continuity Agreement	Exhibit 10(o-4) to the March 2007 Form 10-Q
10(i-1)	Change of Control Agreement dated as of October 25, 2004 between Anthony Guzzi (“Guzzi”) and EMCOR (“Guzzi Continuity Agreement”)	Exhibit E to the Guzzi Letter Agreement
10(i-2)	Amendment dated as of March 1, 2007 to Guzzi Continuity Agreement	Exhibit 10(p-2) to the March 2007 Form 10-Q
10(i-3)	Amendment to Continuity Agreements and Severance Agreements with Anthony J. Guzzi, R. Kevin Matz and Mark A. Pompa	Exhibit 10(q) to EMCOR’s Annual Report on Form 10-K for the year ended December 31, 2008 (“2008 Form 10-K”)

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Exhibit No.	Description	Incorporated By Reference to or Filed Herewith, as Indicated Below

10(j)	Amendment dated as of March 29, 2010 to Severance Agreement with Anthony J. Guzzi, R. Kevin Matz and Mark A. Pompa	Exhibit 10.1 to Form 8-K (Date of Report March 29, 2010) (“March 2010 Form 8-K”)
10(k-1)	Severance Agreement dated as of October 26, 2016 between EMCOR and Maxine L. Mauricio	Exhibit 10(l-1) to the September 2016 Form 10-Q
10(k-2)	Continuity Agreement dated as of October 26, 2016 between EMCOR and Maxine L. Mauricio (“Mauricio Continuity Agreement”)	Exhibit 10(l-2) to the September 2016 Form 10-Q
10(k-3)	Amendment dated April 10, 2017 to Mauricio Continuity Agreement	Exhibit 10(l-3) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017
10(l-1)	EMCOR Group, Inc. Long-Term Incentive Plan (“LTIP”)	Exhibit 10 to Form 8-K (Date of Report December 15, 2005)
10(l-2)	First Amendment to LTIP and updated Schedule A to LTIP	Exhibit 10(s-2) to 2008 Form 10-K
10(l-3)	Second Amendment to LTIP	Exhibit 10.2 to March 2010 Form 8-K
10(l-4)	Third Amendment to LTIP	Exhibit 10(q-4) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (“March 2012 Form 10-Q”)
10(l-5)	Fourth Amendment to LTIP	Exhibit 10(l-5) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013
10(l-6)	Form of Certificate Representing Stock Units issued under LTIP	Exhibit 10(t-2) to EMCOR’s Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Form 10-K”)
10(l-7)	Fifth Amendment to LTIP	Exhibit 10(l-7) to EMCOR’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”)
10(l-8)	Sixth Amendment to LTIP	Exhibit 10(l-8) to 2015 Form 10-K
10(m)	Key Executive Incentive Bonus Plan, as amended and restated	Exhibit B to EMCOR’s Proxy Statement for its Annual Meeting held June 13, 2013
10(n-1)	Amended and Restated 2010 Incentive Plan	Exhibit 10(q-1) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015
10(n-2)	Form of Option Agreement under 2010 Incentive Plan between EMCOR and each non-employee director with respect to grant of options upon re-election at June 11, 2010 Annual Meeting of Stockholders	Exhibit 10(i)(i-2) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010
10(n-3)	Form of Option Agreement under 2010 Incentive Plan, as amended, between EMCOR and each non-employee director electing to receive options as part of annual retainer	Exhibit 10(q)(q) to 2011 Form 10-K
10(o)	EMCOR Group, Inc. Employee Stock Purchase Plan	Exhibit C to EMCOR’s Proxy Statement for its Annual Meeting held June 18, 2008
10(p)	Director Award Program Adopted May 13, 2011, as amended and restated December 14, 2011	Exhibit 10(n)(n) to 2011 Form 10-K
10(q)	Amendment to Option Agreements	Exhibit 10(r)(r) to 2011 Form 10-K
10(r)	Form of Non-LTIP Stock Unit Certificate	Exhibit 10(p)(p) to the March 31, 2012 Form 10-Q
10(s)	Form of Director Restricted Stock Unit Agreement	Exhibit 10(k)(k) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (“June 2012 Form 10-Q”)

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Exhibit No.	Description	Incorporated By Reference to or Filed Herewith, as Indicated Below

10(t)	Director Award Program, as Amended and Restated December 16, 2014	Exhibit 10(z) to EMCOR’s Annual Report on Form 10-K for the year ended December 31, 2014
10(u)	EMCOR Group, Inc. Voluntary Deferral Plan	Exhibit 10(e)(e) to 2012 Form 10-K
10(v)	First Amendment to EMCOR Group, Inc. Voluntary Deferral Plan	Exhibit 10(e)(e) to 2013 Form 10-K
10(w)	Form of Executive Restricted Stock Unit Agreement	Exhibit 10(f)(f) to 2012 Form 10-K
10(x)	Restricted Stock Unit Award Agreement dated June 11, 2015 between EMCOR and Stephen W. Bershad	Exhibit 10(f)(f) to the June 30, 2015 Form 10-Q
10(y)	Executive Compensation Recoupment Policy	Exhibit 10(h)(h) to 2015 Form 10-K
10(z)	Restricted Stock Unit Award Agreement dated June 30, 2017 between EMCOR and Mark A. Pompa	Exhibit 10(f)(f) to EMCOR’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017
11	Computation of Basic EPS and Diluted EPS for the three and nine months ended September 30, 2019 and 2018	Note 6 of the Notes to the Consolidated Financial Statements
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Anthony J. Guzzi, the Chairman, President and Chief Executive Officer	Filed herewith
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Mark A. Pompa, the Executive Vice President, Chief Financial Officer and Treasurer	Filed herewith
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chairman, President and Chief Executive Officer	Furnished
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Executive Vice President, Chief Financial Officer and Treasurer	Furnished
95	Information concerning mine safety violations or other regulatory matters	Filed herewith
101	The following materials from EMCOR Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Equity and (vi) the Notes to Consolidated Financial Statements.	Filed