10-K 1 eme-20171231x10k.htm FORM 10-K Document

 
 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
¨
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)
Registrant’s telephone number, including area code: (203) 849-7800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes  ¨    No  x
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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
x
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
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  x
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $2,809,000,000 as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on the New York Stock Exchange reported for such date. Shares of common stock held by each executive officer and director and by each person who owns 5% or more of the outstanding common stock (based solely on filings of such 5% holders) have been excluded from such calculation as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Number of shares of the registrant’s common stock outstanding as of the close of business on February 16, 2018: 58,373,310 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III. Portions of the definitive proxy statement for the 2018 Annual Meeting of Stockholders, which document will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year to which this Form 10-K relates, are incorporated by reference into Items 10 through 14 of Part III of this Form 10-K.
 
 
 
 
 
 
 
 
 
 


TABLE OF CONTENTS
 
 
 
PAGE
 
Item 1.
 
 
 
 
 
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.




























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FORWARD-LOOKING STATEMENTS
Certain information included in this report, or in other materials we have filed or will file with the Securities and Exchange Commission (the “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “1995 Act”). Such statements are being made pursuant to the 1995 Act and with the intention of obtaining the benefit of the “Safe Harbor” provisions of the 1995 Act. Forward-looking statements are based on information available to us and our perception of such information as of the date of this report and our current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” variations of such wording and other words or phrases of similar meaning in connection with a discussion of our future operating or financial performance, and other aspects of our business, including market share growth, gross profit, project mix, projects with varying profit margins, selling, general and administrative expenses, and trends in our business and other characterizations of future events or circumstances. From time to time, forward-looking statements are also included in our other periodic reports on Forms 10-Q and 8-K, in press releases, in our presentations, on our website and in other material released to the public. Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are only predictions and are subject to risks, uncertainties and assumptions, including those identified below in the “Risk Factors” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, and other sections of this report, and in our Forms 10-Q for the three months ended March 31, 2017, June 30, 2017 and September 30, 2017 and in other reports filed by us from time to time with the SEC as well as in press releases, in our presentations, on our website and in other material released to the public. Such risks, uncertainties and assumptions are difficult to predict, beyond our control and may turn out to be inaccurate, causing actual results to differ materially from those that might be anticipated from our forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in our subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.




























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PART I

ITEM 1. BUSINESS
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.
General
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. In 2017, we had revenues of approximately $7.7 billion. Our services are provided to a broad range of commercial, industrial, utility and institutional customers through approximately 75 operating subsidiaries and joint venture entities. Our executive offices are located at 301 Merritt Seven, Norwalk, Connecticut 06851-1092, and our telephone number at those offices is (203) 849-7800.
We specialize principally in providing construction services relating to electrical and mechanical systems in all types of facilities and in providing various services relating to the operation, maintenance and management of facilities, including refineries and petrochemical plants.
We design, integrate, install, start-up, operate and maintain various electrical and mechanical systems, including:
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Electric power transmission and distribution systems;
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Premises electrical and lighting systems;
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Process instrumentation in the refining, chemical process, food process and mining industries;
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Low-voltage systems, such as fire alarm, security and process control systems;
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Voice and data communications systems;
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Roadway and transit lighting and fiber optic lines;
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Heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems;
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Fire protection systems;
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Plumbing, process and high-purity piping systems;
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Controls and filtration systems;
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Water and wastewater treatment systems;
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Central plant heating and cooling systems;
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Crane and rigging services;
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Millwright services; and
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Steel fabrication, erection, and welding services.
Our building services operations, which are provided to a wide range of facilities, including commercial, utility, institutional and governmental facilities, include:
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Commercial and government site-based operations and maintenance;
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Facility maintenance and services, including reception, security and catering services;
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Outage services to utilities and industrial plants;
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Military base operations support services;
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Mobile mechanical maintenance and services;

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Floor care and janitorial services;
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Landscaping, lot sweeping and snow removal;
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Facilities management;
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Vendor management;
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Call center services;
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Installation and support for building systems;
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Program development, management and maintenance for energy systems;
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Technical consulting and diagnostic services;
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Infrastructure and building projects for federal, state and local governmental agencies and bodies; and
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Small modification and retrofit projects.
Our industrial services are provided to refineries and petrochemical plants and include:
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On-site repairs, maintenance and service of heat exchangers, towers, vessels and piping;
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Design, manufacturing, repair and hydro blast cleaning of shell and tube heat exchangers and related equipment;
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Refinery turnaround planning and engineering services;
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Specialty welding services;
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Overhaul and maintenance of critical process units in refineries and petrochemical plants; and
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Specialty technical services for refineries and petrochemical plants.
We provide construction services and building services directly to corporations, municipalities and federal and state governmental entities, owners/developers, and tenants of buildings. We also provide our construction services indirectly by acting as a subcontractor to general contractors, systems suppliers, property managers and other subcontractors. Our industrial services are generally provided directly to refineries and petrochemical plants. Worldwide, as of December 31, 2017, we had approximately 32,000 employees.
Our revenues are derived from many different customers in numerous industries, which have operations in several different geographical areas. Of our 2017 revenues, approximately 96% were generated in the United States and approximately 4% were generated in foreign countries, substantially all in the United Kingdom. In 2017, approximately 63% of revenues were derived from our construction operations, approximately 27% of revenues were derived from our building services operations and approximately 10% of revenues were derived from our industrial services operations.
During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented as discontinued operations.
The broad scope of our operations is more particularly described below. For information regarding the revenues, operating income and total assets of each of our segments with respect to each of the last three years, and our revenues and assets attributable to the United States and the United Kingdom for the last three years, see Note 17 - Segment Information of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.
Operations
The electrical and mechanical construction services industry has grown over the years due principally to the increased content, complexity and sophistication of electrical and mechanical systems, as well as the installation of more technologically advanced voice and data communications, lighting, and environmental control systems in all types of facilities, in large part due to the integration of digital processing and information technology. For these reasons, buildings need extensive electrical distribution systems. In addition, advanced voice and data communication systems require sophisticated power supplies and extensive low-voltage and fiber-optic communications cabling. Moreover, the need for substantial environmental controls within a building, due to the heightened need for climate control to maintain extensive computer systems at optimal temperatures, and the demand for energy savings and environmental controls in individual spaces have over the years expanded opportunities for our electrical and mechanical services businesses. The demand for these services is typically driven by non-residential construction and renovation activity.

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Electrical and mechanical construction services primarily involve the design, integration, installation and start-up of, and provision of services relating to: (a) electric power transmission and distribution systems, including power cables, conduits, distribution panels, transformers, generators, uninterruptible power supply systems and related switch gear and controls; (b) premises electrical and lighting systems, including fixtures and controls; (c) process instrumentation in the refining, chemical process, food process and mining industries; (d) low-voltage systems, such as fire alarm, security and process control systems; (e) voice and data communications systems, including fiber-optic and low-voltage cabling; (f) roadway and transit lighting and fiber-optic lines; (g) heating, ventilation, air conditioning, refrigeration and clean-room process ventilation systems; (h) fire protection systems; (i) plumbing, process and high-purity piping systems; (j) controls and filtration systems; (k) water and wastewater treatment systems; (l) central plant heating and cooling systems; (m) cranes and rigging; (n) millwrighting; and (o) steel fabrication, erection and welding.
Electrical and mechanical construction services generally fall into one of three categories: (a) large installation projects with contracts often in the multi-million dollar range that involve construction of manufacturing and commercial buildings and institutional and public works projects or the fit-out of large blocks of space within commercial buildings, (b) large and medium sized capital and maintenance projects for manufacturing, petrochemical, oil, industrial and commercial clients and (c) smaller installation projects typically involving fit-out, renovation and retrofit work.
Our United States electrical and mechanical construction operations accounted for about 63% of our 2017 revenues. Of such revenues, approximately 38% were generated by our electrical construction operations and approximately 62% were generated by our mechanical construction operations.
We provide electrical and mechanical construction services for both large and small installation and renovation projects. Our largest projects have included those: (a) for institutional purposes (such as educational and correctional facilities and research laboratories); (b) for manufacturing purposes (such as pharmaceutical plants, steel, pulp and paper mills, chemical, food, automotive and semiconductor manufacturing facilities and power generation); (c) for transportation purposes (such as highways, bridges, airports and transit systems); (d) for commercial purposes (such as office buildings, data centers, convention centers, sports stadiums and shopping malls); (e) for hospitality purposes (such as resorts, hotels and casinos); (f) for water and wastewater purposes; (g) for healthcare purposes; (h) for process facilities (such as oil and gas refineries and chemical processing plants); and (i) for oil and gas pipeline compressor stations and terminal and metering facilities. Our largest projects, which typically range in size from $10.0 million up to and occasionally exceeding $150.0 million and are frequently multi-year projects, represented approximately 30% of our worldwide construction services revenues in 2017.
Our projects of less than $10.0 million accounted for approximately 70% of our worldwide construction services revenues in 2017. These projects are typically completed in less than one year. They usually involve electrical and mechanical construction services when an end-user or owner undertakes construction or modification of a facility to accommodate a specific use. These projects frequently require electrical and mechanical systems to meet special needs such as critical systems power supply, fire protection systems, special environmental controls and high-purity air systems, sophisticated electrical and mechanical systems for data centers, new production lines in manufacturing plants, and office arrangements in existing office buildings. They are not usually dependent upon the new construction market. Demand for these projects and types of services is often prompted by the expiration of leases, changes in technology, or changes in the customer’s plant or office layout in the normal course of a customer’s business.
We have a broad customer base with many long-standing relationships. We perform construction services pursuant to contracts with owners (such as corporations, municipalities and other governmental entities), general contractors, systems suppliers, construction managers, developers, other subcontractors and tenants of commercial properties. Institutional and public works projects are frequently long-term complex projects that require significant technical and management skills and the financial strength to obtain bid and performance bonds, which are often a condition to bidding for and winning these projects.
We also install and maintain lighting for streets, highways, bridges and tunnels, traffic signals, computerized traffic control systems, and signal and communication systems for mass transit systems in several metropolitan areas. In addition, in the United States, we manufacture and install sheet metal air handling systems for both our own mechanical construction operations and for unrelated mechanical contractors. We also maintain welding and pipe fabrication shops in support of some of our mechanical operations.
Our United States building services segment offers a broad range of services, including operation, maintenance and service of electrical and mechanical systems; commercial and government site-based operations and maintenance; facility maintenance and services, including outage services to utilities and manufacturing facilities; 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,

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management and maintenance with respect to 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.
Our building services operations, which generated approximately 27% of our 2017 revenues, provide services to owners, operators, tenants and managers of all types of facilities both on a contractual basis for a specified period of time and on an individual task order basis. Of our 2017 building services revenues, approximately 84% were generated in the United States and approximately 16% were generated in the United Kingdom.
Our building services operations have built upon our traditional electrical and mechanical services operations and our client relationships to expand the scope of services being offered and to develop packages of services for customers on a regional and national basis.
Demand for our building services is often driven by customers’ decisions to focus on their core competencies, customers’ programs to reduce costs, the increasing technical complexity of their facilities and their mechanical, electrical, voice and data and other systems, and the need for increased reliability, especially in electrical and mechanical systems. These trends have led to outsourcing and privatization programs whereby customers in both the private and public sectors seek to contract out those activities that support, but are not directly associated with, the customer’s core business. Clients of our building services business include federal and state governments, institutional organizations, utilities, independent power producers, healthcare providers, and major corporations engaged in information technology, telecommunications, pharmaceuticals, financial services, publishing and other manufacturing, and large retailers and other businesses with geographically dispersed portfolios throughout the United States.
We currently provide building services in a majority of the states in the United States to commercial, industrial, institutional and governmental customers and as part of our operations are responsible for: (a) the oversight of all or most of the facilities operations of a business, including operation and maintenance; (b) servicing, upgrade and retrofit of HVAC, electrical, plumbing and industrial piping and sheet metal systems in existing facilities; (c) interior and exterior services, including floor care and janitorial services, landscaping, lot sweeping and snow removal; (d) diagnostic and solution engineering for building systems and their components; and (e) maintenance and support services to manufacturers and power producers.
In the Washington D.C. metropolitan area, we provide building services at a number of preeminent buildings, including those that house the Secret Service, the Federal Deposit Insurance Corporation, the National Foreign Affairs Training Center, and the Department of Health and Human Services, as well as other government facilities, including the NASA Jet Propulsion Laboratory in Pasadena, California. We also provide building services to a number of military bases, including base operations support services to the Navy National Capital Region and the Army’s Fort Huachuca in Arizona, and are involved in a joint venture providing building services to NASA’s Armstrong Flight Research Center in Edwards, California. The agreements pursuant to which this division provides services to the federal government are frequently for a base year and a number of option years exercisable at the sole discretion of the government, are often subject to renegotiation by the government in terms of scope of services, and are subject to termination by the government prior to the expiration of the applicable term.
Our United Kingdom subsidiary primarily focuses on building services and currently provides a broad range of services under multi-year agreements to public and private sector customers, including utilities, airlines, airports, real estate property managers, manufacturers, governmental agencies and the finance sector.
Our industrial services business, which generated approximately 10% of our 2017 revenues, is a recognized leader in the refinery turnaround market and has a growing presence in the petrochemical market. Our industrial services business: (a) provides after-market maintenance, repair and cleaning services for highly engineered shell and tube heat exchangers for refineries and petrochemical plants both in the field and at our own shops, including tube and shell repairs, bundle repairs, and extraction services, and (b) designs and manufactures new highly engineered shell and tube heat exchangers. We also perform a broad range of turnaround and maintenance services for critical units of refineries so as to upgrade, repair and maintain them. Such services include turnaround and maintenance services relating to: (i) engineering and planning services in advance of complex refinery turnarounds; (ii) overhaul and maintenance of critical process units (including hydrofluoric alkylation units, fluid catalytic cracking units, coking units, heaters, heat exchangers and related mechanical equipment) during refinery and petrochemical plant shut downs; (iii) replacement and new construction capital projects for refineries and petrochemical plants; and (iv) other related specialty services such as (a) welding (including pipe welding) and fabrication; heater, boiler, and reformer repairs and replacements; converter repair and revamps; and vessel, exchanger and tower services; (b) tower and column repairs in refineries and petrochemical facilities; (c) installation and repair of refractory materials for critical units in process plants so as to protect equipment from corrosion, erosion, and extreme temperatures; and (d) acid-proofing services to protect critical components at refineries from chemical exposure.

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Competition
In our construction services, building services and industrial services businesses, we compete with national, regional and local companies, many of which are small, owner-operated entities that carry on their businesses in a limited geographic area, as well as with certain foreign companies.
We believe that the electrical and mechanical construction services businesses are highly fragmented and our competition includes thousands of small companies across the United States. In the United States, there are a few public companies focused on providing either electrical and/or mechanical construction services, such as Integrated Electrical Services, Inc., Comfort Systems USA, Inc. and Tutor Perini Corporation. A majority of our revenues are derived from projects requiring competitive bids; however, an invitation to bid is often conditioned upon prior experience, technical capability and financial strength. Because we have total assets, annual revenues, access to bank credit and surety bonding, and expertise significantly greater than most of our competitors, we believe we have a significant competitive advantage over our competitors in providing electrical and mechanical construction services. Competitive factors in the electrical and mechanical construction services business include: (a) the availability of qualified and/or licensed personnel; (b) reputation for integrity and quality; (c) safety record; (d) cost structure; (e) relationships with customers; (f) geographic diversity; (g) the ability to control project costs; (h) experience in specialized markets; (i) the ability to obtain surety bonding; (j) adequate working capital; (k) access to bank credit; and (l) price. However, there are relatively few significant barriers to entry to several types of our construction services business.
While the building services business is also highly fragmented, with most competitors operating in a specific geographic region, a number of large United States based corporations such as AECOM Technology Corporation, Johnson Controls, Inc., Fluor Corp., J&J Worldwide Services, Cushman & Wakefield Inc., CB Richard Ellis, Inc., Jones Lang LaSalle Incorporated, Sodexo, Inc., Aramark Corporation and ABM Industries Incorporated are engaged in this field, as are large original equipment manufacturers such as Carrier Corp. and Trane Inc. In addition, we compete with several regional firms serving all or portions of the markets we target, such as Brickman Valley Crest, Inc., Kellermeyer Bergensons Services, Inc., SMS Assist, LLC and Ferandino & Sons, Inc. Our principal services competitors in the United Kingdom include ISS UK Ltd. and MITIE Group plc. The key competitive factors in the building services business include price, service, quality, technical expertise, geographic scope and the availability of qualified personnel and managers. Due to our size, both financial and geographic, and our technical capability and management experience, we believe we are in a strong competitive position in the building services business. However, there are relatively few barriers to entry to most of our building services businesses.
In our industrial services business, we are one of the leading North American providers of after-market maintenance and repair services for, and manufacturing of, highly engineered shell and tube heat exchangers and related equipment and a leader in providing specialized services to refineries and petrochemical plants. The market for providing these services and products to refineries and petrochemical plants is highly fragmented and includes large national industrial services providers, as well as numerous regional companies, including JV Industrial Companies Ltd., Matrix Service Company, Starcon, Turner Industries, Team, Inc., Cust-O-Fab, Dunn Heat, and Wyatt Field Service Company. In the manufacture of heat exchangers, we compete with both U.S. and foreign manufacturers. The key competitive factors in the industrial services market include service, quality, ability to respond quickly, technical expertise, price, safety record and availability of qualified personnel. Due to our technical capabilities, safety record and skilled workforce, we believe that we are in a strong competitive position in the industrial services market we serve. Because of the complex tasks associated with turnarounds and the precision required in the manufacture of heat exchangers, we believe that the barriers to entry in this business are significant.
Employees
At December 31, 2017, we employed approximately 32,000 people, approximately 57% of whom are represented by various unions pursuant to approximately 400 collective bargaining agreements between our individual subsidiaries and local unions. We believe that our employee relations are generally good. Only two of these collective bargaining agreements are national or regional in scope.
Backlog
Our backlog at December 31, 2017 was $3.79 billion compared to $3.90 billion of backlog at December 31, 2016. Backlog increases with awards of new contracts and decreases as we perform work on existing contracts. Backlog is not a term recognized under United States generally accepted accounting principles; however, it is a common measurement used in our industry. We include a project within our backlog at such time as a contract is awarded and agreement on contract terms has been reached. Backlog includes unrecognized revenues to be realized from uncompleted construction contracts plus unrecognized revenues expected to be realized over the remaining term of services contracts. However, we do not include in backlog contracts for which we are paid on a time and material basis and a fixed amount cannot be determined, and if the remaining term of a services contract exceeds 12 months, the unrecognized revenues attributable to such contract included in backlog are limited to only the next 12

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months of revenues provided for in the contract award. Our backlog also includes amounts related to services contracts for which a fixed price contract value is not assigned when a reasonable estimate of total revenues can be made from budgeted amounts agreed to with our customers. Our backlog is 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 and (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 we consider recovery to be probable. Such claim amounts were immaterial for all periods presented. Our backlog does not include anticipated revenues from unconsolidated joint ventures or variable interest entities nor anticipated revenues from pass-through costs on contracts for which we are acting in the capacity of an agent and which are reported on the net basis. We believe our backlog is firm, although many contracts are subject to cancellation at the election of our customers. Historically, cancellations have not had a material adverse effect on us. We estimate that 85% of our backlog as of December 31, 2017 will be recognized as revenues during 2018.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission, which we refer to as the “SEC”. These filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.
Our Internet address is www.emcorgroup.com. We make available free of charge through www.emcorgroup.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. References to our website addressed in this report are provided as a convenience and do not constitute, and should not be viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.
Our Board of Directors has an audit committee, a compensation and personnel committee and a nominating and corporate governance committee. Each of these committees has a formal charter. We also have Corporate Governance Guidelines, which include guidelines regarding related party transactions, a Code of Ethics for our Chief Executive Officer and Senior Financial Officers, and a Code of Ethics and Business Conduct for Directors, Officers and Employees. Copies of these charters, guidelines and codes, and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, can be obtained free of charge from our website, www.emcorgroup.com.
You may request a copy of the foregoing filings (excluding exhibits), charters, guidelines and codes and any waivers or amendments to such codes which are applicable to our executive officers, senior financial officers or directors, at no cost by writing to us at EMCOR Group, Inc., 301 Merritt Seven, Norwalk, CT 06851-1092, Attention: Corporate Secretary, or by telephoning us at (203) 849-7800.
ITEM 1A. RISK FACTORS
Our business is subject to a variety of risks, including the risks described below as well as adverse business and market conditions and risks associated with foreign operations. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not known to us or not described below which we have not determined to be material may also impair our business operations. You should carefully consider the risks described below, together with all other information in this report, including information contained in the “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” sections. If any of the following risks actually occur, our business, financial position, results of operations and/or cash flows could be adversely affected, and we may not be able to achieve our goals. Such events may cause actual results to differ materially from expected and historical results, and the trading price of our common stock could decline.
Economic downturns have led to reductions in demand for our services. Negative conditions in the credit markets may adversely impact our ability to operate our business. The level of demand from our clients for our services has been, in the past, adversely impacted by slowdowns in the industries we service, as well as in the economy in general. When the general level of economic activity has been reduced from historical levels, certain of our ultimate customers have delayed or cancelled projects or capital spending, especially with respect to more profitable private sector work, and such slowdowns adversely affect our ability to grow, reducing our revenues and profitability. A number of economic factors, including financing conditions for the industries we serve, have, in the past, adversely affected our ultimate customers and their ability or willingness to fund expenditures. General concerns about the fundamental soundness of domestic and foreign economies may cause ultimate customers to defer projects even if they

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have credit available to them. Worsening of financial and macroeconomic conditions could have a significant adverse effect on our revenues and profitability.
Many of our clients depend on the availability of credit to help finance their capital and maintenance projects. At times, tightened availability of credit has negatively impacted the ability of existing and prospective ultimate customers to fund projects we might otherwise perform, particularly those in the more profitable private sector. As a result, our ultimate customers may defer such projects for an unknown, and perhaps lengthy, period. Any such deferrals would inhibit our growth and would adversely affect our results of operations.
In a weak economic environment, particularly in a period of restrictive credit markets, we may experience greater difficulties in collecting payments from, and negotiating change orders and/or claims with, our clients due to, among other reasons, a diminution in our ultimate customers’ access to the credit markets. If clients delay in paying or fail to pay a significant amount of our outstanding receivables, or we fail to successfully negotiate a significant portion of our change orders and/or claims with clients, it could have an adverse effect on our liquidity, results of operations and financial position.
Our business has traditionally lagged recoveries in the general economy and, therefore, after an economic downtown we may not recover as quickly as the economy at large.
The loss of one or a few customers could have an adverse effect on us. A few clients have in the past and may in the future account for a significant portion of our revenues in any one year or over a period of several consecutive years. Although we have long-standing relationships with many of our significant clients, our clients may unilaterally reduce, fail to renew or terminate their contracts with us at any time. A loss of business from a significant client could have a material adverse effect on our business, financial position and results of operations.
Our business is vulnerable to the cyclical nature of the markets in which our clients operate and is dependent upon the timing and funding of new awards. We provide construction and maintenance services to ultimate customers operating in a number of markets which have been, and we expect will continue to be, cyclical and subject to significant fluctuations due to a variety of factors beyond our control, including economic conditions and changes in client spending.
Regardless of economic or market conditions, investment decisions by our ultimate customers may vary by location or as a result of other factors like the availability of labor, relative construction costs or competitive conditions in their industries. Because we are dependent on the timing and funding of new awards, we are therefore vulnerable to changes in our clients’ markets and investment decisions.
Our business may be adversely affected by significant reductions in government spending or delays or disruptions in the government appropriations process. Some of our businesses derive a significant portion of their revenues from federal, state and local governmental agencies. As a result, reduced or delayed spending by the federal government and/or state and local governments may have a material and adverse impact on our business, financial condition, results of operations and cash flows. Significant reductions in spending aimed at reducing federal, state or local budget deficits, the absence of a bipartisan agreement on the federal government's budget, the impact of sequestration or other changes in budget priorities could result in the deferral, delay or cancellation of projects or contracts that we might otherwise have sought to perform, personnel reductions or the closure of government facilities and offices, potentially impacting the level of demand for our services and our ability to execute, complete and receive compensation for our current contracts, or bid for and enter into new contracts with governmental agencies.
An increase in the prices of certain materials used in our businesses could adversely affect our businesses. We are exposed to market risk of increases in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in all of our operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our fleet of over 10,000 vehicles. While we believe we can increase our prices to adjust for some price increases in commodities, there can be no assurance that price increases of commodities, 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 or fuel costs could reduce our profitability with respect to such projects. Fluctuations in energy prices as well as in commodity prices of materials may adversely affect our customers and as a result cause them to curtail the use of our services. Prolonged volatility in the price of oil has caused some of our refinery customers to curtail or delay maintenance or capital projects. Continued volatility in the price of oil may adversely affect some of our refinery customers causing them to defer maintenance and/or capital projects performed by companies in our United States industrial services segment or delay purchases or repairs of heat exchangers that are manufactured and repaired by some of our companies.
Our industry is highly competitive. Our industry is served by numerous small, owner-operated private companies, a few public companies and several large regional companies. In addition, relatively few barriers prevent entry into most of our businesses. As a result, any organization that has adequate financial resources and access to technical expertise may become a competitor. Competition in our industry depends on numerous factors, including price. Certain of our competitors have lower overhead cost

7

structures and, therefore, are able to provide their services at lower rates than we are currently able to provide. In addition, some of our competitors have greater resources than we do. We cannot be certain that our competitors will not develop the expertise, experience and resources necessary to provide services that are superior in quality and lower in price to ours. Similarly, we cannot be certain that we will be able to maintain or enhance our competitive position within our industries or maintain a customer base at current levels. We may also face competition from the in-house service organizations of existing or prospective customers, particularly with respect to building services. Many of our customers employ personnel who perform some of the same types of building services that we do. We cannot be certain that our existing or prospective customers will continue to outsource building services in the future.
We are subject to many laws and regulations, including those affecting U.S. public companies; changes to such laws and regulations may result in additional costs and impact our operations. We are committed to upholding the highest standards of corporate governance and legal and ethical compliance. We are subject to many laws and regulations, including various laws and regulations that apply specifically to U.S. public companies. These include the rules and regulations of the New York Stock Exchange, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the various regulations, standards and guidance put forth by the SEC and other governmental agencies to implement those laws. New laws, rules and regulations, or changes to existing laws or their interpretations, could create added legal and financial costs and uncertainty for us. Our efforts to comply with evolving laws, regulations and reporting standards may increase our general and administrative expenses, divert management time and attention or limit our operational flexibility, all of which could have a material adverse effect on our financial position and results of operations. Many of our non-public competitors are not subject to these laws and regulations and the related costs and expenses of compliance.
The Tax Cuts and Jobs Act of 2017 could have negative or unexpected consequences for our customers; reduced government spending may adversely affect our own business. The long-term impact of the Tax Cuts and Jobs Act of 2017 on the general economy cannot be reliably predicted at this time and will require rule-making and interpretation in a number of areas. To the extent that certain of our customers are negatively affected by the new tax law and/or any uncertainty around the changes in the law or how it will be enforced, they may reduce spending and defer, delay or cancel projects or contracts. Reduced government revenues resulting from the new tax law may also lead to reduced government spending, which may negatively impact our government contracting business.
We are a decentralized company, which presents certain risks. While we believe decentralization has enhanced our growth and enabled us to remain responsive to opportunities and to our customers’ needs, it necessarily places significant control and decision-making powers in the hands of local management. This presents various risks, including the risk that we may be slower or less able to identify or react to problems affecting a key business than we would in a more centralized environment.
Our business may be affected by weather conditions. Adverse weather conditions, particularly during the winter season, could impact our construction services operations as those conditions affect our ability to perform efficient work outdoors in certain regions of the United States, adversely affecting the revenues and profitability of those operations. However, the absence of snow in certain regions of the United States during the winter could also cause us to experience reduced revenues and profitability in our United States building services segment, which has meaningful snow removal operations. In addition, cooler than normal temperatures during the summer months could reduce the need for our services, particularly in our businesses that install or service air conditioning units, and result in reduced revenues and profitability during the period such unseasonal weather conditions persist. Hurricanes and other severe weather may cause our projects to be delayed or canceled by our customers.
Natural disasters, terrorist attacks and other catastrophic events could disrupt our operations and services. Natural disasters, acts of terrorism and other catastrophic events, and the actions taken by the United States and/or other governments or actors in response to such events, may result in property damage, supply disruption or economic dislocations throughout the country. Although it is not possible to predict such events or their consequences, these events could increase the volatility of our financial results due to decreased demand and unforeseen costs, with partial or no corresponding compensation from clients.
Our business may be affected by the work environment. We perform our work under a variety of conditions, including but not limited to, difficult terrain, difficult site conditions and busy urban centers where delivery of materials and availability of labor may be impacted, clean-room environments where strict procedures must be followed, and sites which may have been exposed to harsh and hazardous conditions, especially at chemical plants, refineries and other process facilities. Performing work under these conditions can negatively affect efficiency and, therefore, our profitability.
Our dependence upon fixed price contracts could adversely affect our business. We currently generate, and expect to continue to generate, a significant portion of our revenues from fixed price contracts. We must estimate the total costs of a particular project to bid for fixed price contracts. The actual cost of labor and materials, however, may vary from the costs we originally estimated. These variations, along with other risks, inherent in performing fixed price contracts, may cause actual gross profits from projects to differ from those we originally estimated and could result in reduced profitability or losses on projects. Depending upon the

8

size of a particular project, variations from the estimated contract costs can have a significant impact on our operating results for any fiscal quarter or year.
We could incur additional costs to cover certain guarantees. In some instances, we guarantee completion of a project by a specific date or price, cost savings, achievement of certain performance standards or performance of our services at a certain standard of quality. If we subsequently fail to meet such guarantees, we may be held responsible for costs resulting from such failures. Such a failure could result in our payment of liquidated or other damages. To the extent that any of these events occur, the total costs of a project could exceed the original estimated costs, and we would experience reduced profits or, in some cases, a loss.
Many of our contracts, especially our building services contracts for governmental and non-governmental entities, may be canceled on short notice, and we may be unsuccessful in replacing such contracts if they are canceled or as they are completed or expire. We could experience a decrease in revenues, net income and liquidity if any of the following occur:
•
customers cancel a significant number of contracts;
•
we fail to win a significant number of our existing contracts upon re-bid;
•
we complete a significant number of non-recurring projects and cannot replace them with similar projects; or
•
we fail to reduce operating and overhead expenses consistent with any decrease in our revenues.
We may be unsuccessful in generating internal growth. Our ability to generate internal growth will be affected by, among other factors, our ability to:
•
expand the range of services offered to customers to address their evolving needs;
•
attract new customers; and
•
retain and/or increase the number of projects performed for existing customers.
In addition, existing and potential customers in the past have reduced, and may continue to reduce, the number or size of projects available to us because of general economic conditions or due to their inability to obtain capital or pay for services we provide. Many of the factors affecting our ability to generate internal growth are beyond our control, and we cannot be certain that our strategies will be successful or that we will be able to generate cash flow sufficient to fund our operations and to support internal growth. If we are not successful, we may not be able to achieve internal growth, expand operations or grow our business.
The departure of key personnel could disrupt our business. We depend on the continued efforts of our senior management. The loss of key personnel, or the inability to hire and retain qualified executives, could negatively impact our ability to manage our business.
We may be unable to attract and retain skilled employees. Our ability to grow and maintain productivity and profitability will be limited by our ability to employ, train and retain skilled personnel necessary to meet our requirements. We are dependent upon our project managers and field supervisors who are responsible for managing our projects, and there can be no assurance that any individual will continue in his or her capacity for any particular period of time. The loss of such qualified employees could have an adverse effect on our business. We cannot be certain that we will be able to maintain an adequate skilled labor force necessary to operate efficiently and to support our business strategy or that labor expenses will not increase as a result of a shortage in the supply of these skilled personnel. Labor shortages or increased labor costs could impair our ability to maintain our business or grow our revenues.
Our unionized workforce could adversely affect our operations, and we participate in many multiemployer union pension plans which could result in substantial liabilities being incurred. As of December 31, 2017, approximately 57% of our employees were covered by collective bargaining agreements. Although the majority of these agreements prohibit strikes and work stoppages, we cannot be certain that strikes or work stoppages will not occur in the future. However, only two of our collective bargaining agreements are national or regional in scope, and not all of our collective bargaining agreements expire at the same time. Strikes or work stoppages would adversely impact our relationships with our customers and could have a material adverse effect on our financial position, results of operations and cash flows. We contribute to approximately 200 multiemployer union pension plans based upon wages paid to our union employees that could result in our being responsible for a portion of the unfunded liabilities under such plans. Our potential liability for unfunded liabilities could be material. Under the Employee Retirement Income Security Act, we may become liable for our proportionate share of a multiemployer pension plan’s underfunding if we cease to contribute to that pension plan or significantly reduce the employees in respect of which we make contributions to that pension plan. See Note 14 - Retirement Plans of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for additional information regarding multiemployer plans.

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Fluctuating foreign currency exchange rates impact our financial results. We have operations in the United Kingdom, which in 2017 accounted for approximately 4% of our revenues. Our reported financial position and results of operations are exposed to the effects (both positive and negative) that fluctuating exchange rates have on the process of translating the financial statements of our United Kingdom operations, which are denominated in local currencies, into the U.S. dollar.
Our failure to comply with environmental laws could result in significant liabilities. Our operations are subject to various laws, including environmental laws and regulations, among which many deal with the handling and disposal of asbestos and other hazardous or universal waste products, PCBs and fuel storage. A violation of such laws and regulations may expose us to various claims, including claims by third parties, as well as remediation costs and fines. We own and lease many facilities. Some of these facilities contain hazardous materials, such as lead and asbestos, and fuel storage tanks, which may be above or below ground. If these tanks were to leak, we could be responsible for the cost of remediation as well as potential fines. As a part of our business, we also install fuel storage tanks and are sometimes required to deal with hazardous materials, all of which may expose us to environmental liability.
In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or leaks, the imposition of new clean-up requirements, or the exposure of our employees or other contractors to hazardous materials, could require us to incur significant costs or become the basis for new or increased liabilities that could harm our financial position and results of operations, although certain of these costs might be covered by insurance. In some instances, we have obtained indemnification or covenants from third parties (including predecessors or lessors) for such clean-up and other obligations and liabilities, and we believe such indemnities and covenants are adequate to cover such obligations and liabilities. However, such third-party indemnities or covenants may not cover all of such costs or third-party indemnitors may default on their obligations. In addition, unanticipated obligations or liabilities, or future obligations and liabilities, may have a material adverse effect on our business operations. Further, we cannot be certain that we will be able to identify, or be indemnified for, all potential environmental liabilities relating to any acquired business.
Adverse resolution of litigation and other legal and regulatory proceedings may harm our operating results or financial position. From time to time, we are a party to lawsuits and other legal proceedings, most of which occur in the normal course of our business. These actions and proceedings may involve actual or threatened claims by customers and/or employees for, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract, property damage or other general commercial disputes. In addition, we may be subject to class action claims alleging violations of the Fair Labor Standards Act and state wage and hour laws. Litigation and other legal proceedings can be expensive, lengthy and disruptive to normal business operations, and their outcome is inherently uncertain and difficult to accurately predict or quantify. In addition, plaintiffs in many types of actions may seek punitive damages, civil penalties, consequential damages or other losses, or injunctive or declaratory relief. An unfavorable resolution of a particular legal proceeding or claim, whether through a settlement, mediation, court judgment or otherwise, could have a material adverse effect on our business, operating results, financial position and cash flows, and in some cases, on our reputation or our ability to obtain projects from customers, including governmental entities. See Item 3. Legal Proceedings and Note 15 - Commitments and Contingencies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, for more information regarding legal proceedings in which we are involved.
Opportunities within the government sector could lead to increased governmental rules and regulations applicable to us. As a government contractor we are subject to a number of procurement rules and other regulations, any deemed violation of which could lead to fines or penalties or a loss of business. Government agencies routinely audit and investigate government contractors. Government agencies may review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. If government agencies determine through these audits or reviews that costs are improperly allocated to specific contracts, they will not reimburse the contractor for those costs or may require the contractor to refund previously reimbursed costs. If government agencies determine that we are engaged in improper activity, we may be subject to civil and criminal penalties and debarment or suspension from doing business with the government. Government contracts are also subject to renegotiation of terms by the government, termination by the government prior to the expiration of the term, and non-renewal by the government.
A material portion of our business depends on our ability to provide surety bonds. We may be unable to compete for or work on certain projects if we are not able to obtain the necessary surety bonds. Our construction contracts frequently require that we obtain from surety companies and provide to our customers payment and performance bonds as a condition to the award of such contracts. Such surety bonds secure our payment and performance obligations. Under standard terms in the surety market, surety companies issue bonds on a project-by-project basis and can decline to issue bonds at any time or require the posting of collateral as a condition to issuing any bonds. Current or future market conditions, as well as changes in our sureties’ assessment of our or their own operating and financial risk, could cause our surety companies to decline to issue, or substantially reduce the amount of, bonds for our work or to increase our bonding costs. These actions can be taken on short notice. If our surety companies were to limit or eliminate our access to bonding, our alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting other forms of collateral for project performance, such as

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letters of credit, parent company guarantees or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. Accordingly, if we were to experience an interruption or reduction in the availability of bonding, we may be unable to compete for or work on certain projects. Increases in the costs of surety bonds could also adversely impact our profitability.
We are effectively self-insured against many potential liabilities. Although we maintain insurance policies with respect to a broad range of risks, including automobile liability, general liability, workers’ compensation and employee group health, these policies do not cover all possible claims and certain of the policies are subject to large deductibles. Accordingly, we are effectively self-insured for a substantial number of actual and potential claims. In addition, if any of our insurance carriers defaulted on its obligations to provide insurance coverage by reason of its insolvency or for other reasons, our exposure to claims would increase and our profits would be adversely affected. Our estimates for unpaid claims and expenses are based on known facts, historical trends and industry averages, utilizing the assistance of an actuary. The determination of such estimated liabilities and their appropriateness are reviewed and updated at least quarterly. However, these liabilities are difficult to assess and estimate due to many relevant factors, the effects of which are often unknown, including the severity of an injury or damage, the determination of liability in proportion to other parties, the timeliness of reported claims, the effectiveness of our risk management and safety programs and the terms and conditions of our insurance policies. Our accruals are based upon known facts, historical trends and our reasonable estimate of future expenses, and we believe such accruals are adequate. However, unknown or changing trends, risks or circumstances, such as increases in claims, a weakening economy, increases in medical costs, changes in case law or legislation or changes in the nature of the work we perform, could render our current estimates and accruals inadequate. In such case, adjustments to our balance sheet may be required and these increased liabilities would be recorded in the period that the experience becomes known. Insurance carriers may be unwilling, in the future, to provide our current levels of coverage without a significant increase in insurance premiums and/or collateral requirements to cover our obligations to them. Increased collateral requirements may be in the form of additional letters of credit and/or cash, and an increase in collateral requirements could significantly reduce our liquidity. If insurance premiums increase, and/or if insurance claims are higher than our estimates, our profitability could be adversely affected.
We may incur liabilities or suffer negative financial impact relating to occupational, health and safety matters. Our operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While we have invested, and will continue to invest, substantial resources in our robust occupational, health and safety programs, many of our businesses involve a high degree of operational risk, and there can be no assurance that we will avoid significant exposure. These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and other consequential damages and could lead to suspension of operations, large damage claims and, in extreme cases, criminal liability.
Our customers seek to minimize safety risks on their sites and they frequently review the safety records of contractors during the bidding process. If our safety record were to substantially deteriorate over time, we might become ineligible to bid on certain work and our customers could cancel our contracts and/or not award us future business.
Acquisitions could adversely affect our business and results of operations. As part of our growth strategy, we acquire companies that expand, complement and/or diversify our businesses. Realization of the anticipated benefits of an acquisition will depend, among other things, upon our ability to: (a) effectively conduct due diligence on companies we propose to acquire to identify problems at these companies and (b) recognize incompatibilities or other obstacles to successful integration of the acquired business with our other operations and gain greater efficiencies and scale that will translate into reduced costs in a timely manner. However, there can be no assurance that an acquisition we may make in the future will provide the benefits anticipated when entering into the transaction. Acquisitions we have made and future acquisitions may expose us to operational challenges and risks, including the diversion of management’s attention from our existing businesses, the failure to retain key personnel or customers of the acquired business and the assumption of unknown liabilities of the acquired business for which there are inadequate reserves. Our ability to sustain our growth and maintain our competitive position may be affected by our ability to identify and acquire desirable businesses and successfully integrate any business acquired.
Our results of operations could be adversely affected as a result of goodwill and other identifiable intangible asset impairments. When we acquire a business, we record an asset called “goodwill” equal to the excess amount paid for the business, including liabilities assumed, over the fair value of the tangible and identifiable intangible assets of the business acquired. The Financial Accounting Standards Board (“FASB”) requires that all business combinations be accounted for using the acquisition method of accounting and that certain identifiable intangible assets acquired in a business combination be recognized as assets apart from goodwill. FASB Accounting Standard Codification (“ASC”) Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”), provides that goodwill and other identifiable intangible assets that have indefinite useful lives not be amortized, but instead be tested at least annually for impairment, and identifiable intangible assets that have finite useful lives should continue to be amortized over their useful lives and be tested for impairment whenever facts and circumstances indicate that the carrying values may not be fully recoverable. ASC 350 also provides specific guidance for testing goodwill and other non-amortized identifiable intangible assets for impairment, which we test annually each October 1. ASC 350 requires management to make certain estimates and assumptions to allocate goodwill to reporting units and to determine the fair value of reporting unit net assets and liabilities. Such fair value is determined using discounted estimated future cash flows. Our development of the present value of future cash flow projections is

11

based upon assumptions and estimates by management from a review of our operating results, business plans, anticipated growth rates and margins and the weighted average cost of capital, among others. Much of the information used in assessing fair value is outside the control of management, such as interest rates, and these assumptions and estimates can change in future periods. There can be no assurance that our 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 business plans 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, whether in connection with our next annual impairment testing on October 1, 2018 or earlier, if an indicator of an impairment is present prior to the quarter in which the annual goodwill impairment test is to be performed. It is not possible at this time to determine if any such additional impairment charge would result or, if it does, whether such a charge would be material to our results of operations.
Amounts included in our backlog may not result in actual revenues or translate into profits. Many contracts are subject to cancellation or suspension on short notice at the discretion of the client, and the contracts in our backlog are subject to changes in the scope of services to be provided as well as adjustments to the costs relating to the contract. Accordingly, there is no assurance that backlog will actually be realized. If our backlog fails to materialize, we could experience a reduction in revenues and a decline in profitability, which could result in a deterioration of our financial position and liquidity.
We recognize revenue for the majority of our construction projects based on estimates; therefore, variations of actual results from our assumptions may reduce our profitability. In accordance with United States generally accepted accounting principles, we record revenue as work on the contract progresses. The cumulative amount of revenues recorded on a contract at a specified point in time is that percentage of total estimated revenues that costs incurred to date bear to estimated total costs. Accordingly, contract revenues and total cost estimates are reviewed and revised as the work progresses. Adjustments are reflected in contract revenues in the period when such estimates are revised. Estimates are based on management’s reasonable assumptions and experience, but are only estimates. Variations of actual results from assumptions on an unusually large project or on a number of average size projects could be material. We are also required to immediately recognize the full amount of the estimated loss on a contract when estimates indicate such a loss. Such adjustments and accrued losses could result in reduced profitability, which could negatively impact our cash flow from operations.
We are increasingly dependent on sophisticated information technology systems; disruption, failure or cyber-security breaches of these systems could adversely affect our business and results of operations. We and our customers and third party providers rely on information technology systems and hardware and third party software to run critical accounting, project management and financial information systems. We rely upon security measures, products and services to secure our information technology systems and the confidential, proprietary and sensitive information they contain. However, our information technology systems and those of our customers and third-party providers could become subject to cyber-attacks, hacking, or other intrusions, failure or damage, which could result in operational disruptions or information misappropriation, such as theft of intellectual property or inappropriate disclosure of customer data or confidential or personal information. In addition, the proper functioning of these systems may be impacted by other causes and circumstances beyond our control, including the decision by software vendors to discontinue further development, integration or long-term software maintenance support for our information systems, or hardware interruption, damage or disruption as a result of power outages, natural disasters, or computer network failures. To the extent that our information technology systems, or those of our customers or third party providers, are disabled for a long period of time, certain key business processes could be interrupted. Any such operational disruptions and/or misappropriation or inappropriate disclosure of information could result in lost or reduced revenues, negative publicity, or business delays that could have a material adverse effect on our business, financial position and results of operations. We may also be required to expend significant resources to protect against the threat of such system disruptions and security breaches or to alleviate problems caused by such disruptions and breaches.
Our failure to comply with anti-bribery statutes such as the Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010 could result in fines, criminal penalties and other sanctions that could have an adverse effect on our business. The U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act of 2010 (the “Bribery Act”) and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business or securing an improper advantage. We conduct a modest amount of business in a few countries that have experienced corruption to some degree. Our policies require that all of our employees, subcontractors, vendors and agents worldwide must comply with applicable anti-bribery laws. However, there is no assurance that our policies and procedures to ensure compliance with the FCPA, the Bribery Act and similar anti-bribery laws will eliminate the possibility of liability under such laws for actions taken by our employees, agents and intermediaries. If we were found to be liable for violations under the FCPA, the Bribery Act or similar anti-bribery laws, either due to our own acts or omissions or due to the acts or omissions of others, we could incur substantial legal expenses and suffer civil and criminal penalties or other sanctions, which could have a material adverse effect on our business, financial condition and results of operations, as well as our reputation. In addition, whether or not such expenses, penalties or sanctions are actually incurred, the actual or alleged violation of the FCPA, Bribery Act or similar anti-bribery laws could have a negative impact on our reputation.

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Certain provisions of our corporate governance documents could make an acquisition of us, or a substantial interest in us, more difficult. The following provisions of our certificate of incorporation and by-laws, as currently in effect, as well as Delaware law, could discourage potential proposals to acquire us, delay or prevent a change in control of us, or limit the price that investors may be willing to pay in the future for shares of our common stock:
•
our certificate of incorporation permits our board of directors to issue “blank check” preferred stock and to adopt amendments to our by-laws;
•
our by-laws contain restrictions regarding the right of our stockholders to nominate directors and to submit proposals to be considered at stockholder meetings;
•
our certificate of incorporation and by-laws limit the right of our stockholders to call a special meeting of stockholders and to act by written consent; and
•
we are subject to provisions of Delaware law, which prohibit us from engaging in any of a broad range of business transactions with an “interested stockholder” for a period of three years following the date such stockholder becomes classified as an interested stockholder.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES                 
Our operations are conducted primarily at leased properties. The following table lists facilities over 50,000 square feet, both leased and owned, and identifies the business segment that is the principal user of each such facility.
 
 
Approximate Square Feet
 
Lease Expiration Date, Unless Owned 
17905 and 18101 S. Broadway
Carson, California (b)
68,160

 
7/31/2020
1168 Fesler Street
El Cajon, California (b)
67,560

 
8/31/2020
22302 Hathaway Avenue
Hayward, California (b)
105,000

 
7/31/2021
4462 Corporate Center Drive
Los Alamitos, California (a)
57,863

 
12/31/2019
940 Remillard Court
San Jose, California (c)
119,560

 
7/31/2024
3100 Woodcreek Drive
Downers Grove, Illinois (a)
56,551

 
7/31/2027
2219 Contractors Drive
Fort Wayne, Indiana (b)
175,000

 
7/31/2023
5210 Investment Drive
Fort Wayne, Indiana (b)
99,579

 
10/31/2023
7614 and 7720 Opportunity Drive
Fort Wayne, Indiana (b)
144,695

 
10/31/2018
2655 Garfield Avenue
Highland, Indiana (a)
57,765

 
6/30/2019
4250 Highway 30
St. Gabriel, Louisiana (d)
90,000

 
Owned
1750 Swisco Road
Sulphur, Louisiana (d)
112,000

 
Owned
111-01 and 111-21 14th Avenue
College Point, New York (a)
73,013

 
2/28/2024
70 Schmitt Boulevard
Farmingdale, New York (b)
76,380

 
7/31/2026
2102 Tobacco Road
Durham, North Carolina (b)
55,944

 
12/31/2018
6101 Triangle Drive
Raleigh, North Carolina (b)
53,394

 
12/31/2024
2900 Newpark Drive
Barberton, Ohio (b)
113,663

 
10/31/2027
1700 Markley Street
Norristown, Pennsylvania (c)
90,767

 
9/30/2021
6045 East Shelby Drive
Memphis, Tennessee (c)
53,618

 
5/31/2023
937 Pine Street
Beaumont, Texas (d)
78,962

 
Owned
895 North Main Street
Beaumont, Texas (d)
75,000

 
Owned
410 Flato Road
Corpus Christi, Texas (d)
57,000

 
Owned
5550 Airline Drive and 25 Tidwell Road
Houston, Texas (b)
97,936

 
12/31/2019

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Approximate Square Feet
 
Lease Expiration Date, Unless Owned 
12415 Highway 225
La Porte, Texas (d)
78,000

 
Owned
2455 West 1500 South
Salt Lake City, Utah (a)
58,339

 
4/30/2018
2345 South CCI Way
West Valley City, Utah (c)
69,229

 
8/31/2027
We believe that our property, plant and equipment are well maintained, in good operating condition and suitable for the purposes for which they are used.
See Note 15 - Commitments and Contingencies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for additional information regarding lease costs. We utilize substantially all of our leased or owned facilities and believe there will be no difficulty either in negotiating the renewal of our real property leases as they expire or in finding alternative space, if necessary.
 
 
(a)
Principally used by a company engaged in the “United States electrical construction and facilities services” segment.
(b)
Principally used by a company engaged in the “United States mechanical construction and facilities services” segment.
(c)
Principally used by a company engaged in the “United States building services” segment.
(d)
Principally used by a company engaged in the “United States industrial services” segment.

15

ITEM 3. LEGAL PROCEEDINGS    
We are involved in several 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. See Note 15 - Commitments and Contingencies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for a discussion regarding certain legal proceedings.
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 Form 10-K.


16

EXECUTIVE OFFICERS OF THE REGISTRANT
Anthony J. Guzzi, Age 53; President since October 2004 and Chief Executive Officer since January 2011. From October 2004 to January 2011, Mr. Guzzi served as Chief Operating Officer of the Company. From August 2001, until he joined the Company, Mr. Guzzi served as President of the North American Distribution and Aftermarket Division of Carrier Corporation (“Carrier”). Carrier is a manufacturer and distributor of commercial and residential HVAC and refrigeration systems and equipment and a provider of after-market services and components of its own products and those of other manufacturers in both the HVAC and refrigeration industries. Mr. Guzzi is also a member of our Board of Directors.
Mark A. Pompa, Age 53; Executive Vice President and Chief Financial Officer of the Company since April 2006. From June 2003 to April 2006, Mr. Pompa was Senior Vice President-Chief Accounting Officer of the Company, and from June 2003 to January 2007, Mr. Pompa was also Treasurer of the Company. From September 1994 to June 2003, Mr. Pompa was Vice President and Controller of the Company.
R. Kevin Matz, Age 59; Executive Vice President-Shared Services of the Company since December 2007 and Senior Vice President-Shared Services from June 2003 to December 2007. From April 1996 to June 2003, Mr. Matz served as Vice President and Treasurer of the Company and Staff Vice President-Financial Services of the Company from March 1993 to April 1996.
Maxine L. Mauricio, Age 46; Senior Vice President, General Counsel and Secretary of the Company since January 2016. From January 2012 to December 2015, Ms. Mauricio was Vice President and Deputy General Counsel of the Company, and from May 2002 to December 2011, she served as Assistant General Counsel of the Company. Prior to joining the Company, Ms. Mauricio was an associate at Ropes & Gray LLP.

17

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information. Our common stock trades on the New York Stock Exchange under the symbol “EME”.
The following table sets forth high and low sales prices for our common stock for the periods indicated as reported by the New York Stock Exchange:  
2017
High
 
Low
First Quarter
$
72.88

 
$
59.76

Second Quarter
$
69.14

 
$
60.30

Third Quarter
$
70.26

 
$
62.15

Fourth Quarter
$
84.11

 
$
68.77

2016
High
 
Low
First Quarter
$
49.05

 
$
40.98

Second Quarter
$
49.88

 
$
44.27

Third Quarter
$
60.33

 
$
47.69

Fourth Quarter
$
73.44

 
$
55.10

Holders. As of February 16, 2018, there were approximately 307 stockholders of record and, as of that date, we estimate there were approximately 40,678 beneficial owners holding our common stock in nominee or “street” name.
Dividends. We have paid quarterly dividends since October 25, 2011. We expect that such quarterly dividends will be paid in the foreseeable future. Prior to October 25, 2011, no cash dividends had been paid on the Company’s common stock. 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. See Note 9 - Debt of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further information regarding our 2016 Credit Agreement.
Securities Authorized for Issuance Under Equity Compensation Plans. The following table summarizes, as of December 31, 2017, certain information regarding equity compensation plans that were approved by stockholders and equity compensation plans that were not approved by stockholders. The information in the table and in the notes thereto has been adjusted for stock splits.
 
 
Equity Compensation Plan Information
 
 
 
A
 
B
 
C
 
Plan Category
 
Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights
 
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights
 
Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column A)
 
Equity Compensation Plans Approved by Security Holders
 
699,072

(1) 
$
3.26

(1) 
1,461,316

(2) 
Equity Compensation Plans Not Approved by Security Holders
 
—

 
—

 
—

 
Total
 
699,072

 
$
3.26

 
1,461,316

 
_________
 
(1)
Included within this amount are 606,072 restricted stock units awarded to our non-employee directors and employees. The weighted average exercise price would have been $24.48 had the weighted average exercise price calculation excluded such restricted stock units.
(2)
Represents shares of our common stock available for future issuance under our 2010 Incentive Plan (the "2010 Plan"), which may be issuable in respect of options and/or stock appreciation rights granted under the 2010 Plan and/or may also be issued pursuant to the award of restricted stock, unrestricted stock and/or awards that are valued in whole or in part by reference to, or are otherwise based on the fair market value of, our common stock.

18

Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes repurchases of our common stock made by us during the quarter ended December 31, 2017: 
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
Maximum Number
(or Approximate Dollar Value)
of Shares That May Yet be
Purchased Under
the Plan or Programs
 
 
 
 
 
October 1, 2017 to
October 31, 2017
None

None
None

$176,972,856
November 1, 2017 to
November 30, 2017
20,005

$78.91
20,005

$175,394,253
December 1, 2017 to
December 31, 2017
8,073

$79.66
8,073

$174,751,129
_________
 
(1)
On September 26, 2011, our Board of Directors authorized us to repurchase up to $100.0 million of our outstanding common stock. On December 5, 2013, October 23, 2014, October 28, 2015 and October 25, 2017, our Board of Directors authorized us to repurchase up to an additional $100.0 million, $250.0 million, $200.0 million and $100.0 million of our outstanding common stock, respectively. As of December 31, 2017, there remained authorization for us to repurchase approximately $174.8 million of our shares. No shares have been repurchased by us since the programs have been announced other than pursuant to these publicly announced programs. The repurchase programs have no expiration date and do 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.


19

ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited financial statements and should be read in conjunction with the consolidated financial statements, the related notes thereto and the report of our independent registered public accounting firm thereon included elsewhere in this and our previously filed annual reports on Form 10-K.
See Note 3 - Acquisitions of Businesses and Note 4 - Disposition of Assets of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for a discussion regarding acquisitions and dispositions. During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented as discontinued operations.
Income Statement Data
(In thousands, except per share data)
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Revenues
$
7,686,999

 
$
7,551,524

 
$
6,718,726

 
$
6,424,965

 
$
6,333,527

Gross profit
$
1,147,012

 
$
1,037,862

 
$
944,479

 
$
907,246

 
$
821,646

Impairment loss on goodwill and identifiable intangible assets
$
57,819

 
$
2,428

 
$
—

 
$
1,471

 
$
—

Gain on sale of building
$
—

 
$
—

 
$
—

 
$
11,749

 
$
—

Operating income
$
330,554

 
$
308,458

 
$
287,082

 
$
289,878

 
$
240,350

Net income attributable to EMCOR Group, Inc.
$
227,196

 
$
181,935

 
$
172,286

 
$
168,664

 
$
123,792

 
 
 
 

 
 

 
 

 
 

Basic earnings (loss) per common share:
 
 
 

 
 

 
 

 
 

From continuing operations
$
3.85

 
$
3.05

 
$
2.74

 
$
2.61

 
$
2.19

From discontinued operations
(0.01
)
 
(0.05
)
 
(0.00
)
 
(0.07
)
 
(0.34
)
 
$
3.84

 
$
3.00

 
$
2.74

 
$
2.54

 
$
1.85

 
 
 
 

 
 

 
 

 
 

Diluted earnings (loss) per common share:
 
 
 

 
 

 
 

 
 

From continuing operations
$
3.83

 
$
3.02

 
$
2.72

 
$
2.59

 
$
2.16

From discontinued operations
(0.01
)
 
(0.05
)
 
(0.00
)
 
(0.07
)
 
(0.34
)
 
$
3.82

 
$
2.97

 
$
2.72

 
$
2.52

 
$
1.82

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data
(In thousands) 
 
As of December 31,  
 
2017
 
2016
 
2015
 
2014
 
2013
Equity (1)
$
1,674,117

 
$
1,537,942

 
$
1,480,056

 
$
1,429,387

 
$
1,479,626

Total assets
$
3,965,904

 
$
3,852,438

 
$
3,506,706

 
$
3,354,558

 
$
3,427,023

Goodwill
$
964,893

 
$
979,628

 
$
843,170

 
$
834,102

 
$
834,825

Borrowings under revolving credit facility
$
25,000

 
$
125,000

 
$
—

 
$
—

 
$
—

Term loan, including current maturities
$
284,810

 
$
300,000

 
$
315,000

 
$
332,500

 
$
350,000

Other long-term debt, including current maturities
$
20

 
$
31

 
$
44

 
$
57

 
$
11

Capital lease obligations, including current maturities
$
4,571

 
$
3,732

 
$
3,869

 
$
2,883

 
$
4,652

  _______
(1)
During 2017, we repurchased approximately 1.4 million shares of our common stock for approximately $90.8 million. Since the inception of the repurchase programs in 2011 through December 31, 2017, we have repurchased approximately 12.8 million shares of our common stock for approximately $575.2 million. The repurchase of shares results in a reduction of our equity. We have paid quarterly dividends since October 25, 2011. We currently pay a regular quarterly dividend of $0.08 per share, and we expect that quarterly dividends will be paid in the foreseeable future.

20

ITEM 7. 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 75 operating subsidiaries and joint venture entities. Our offices are located in the United States and the United Kingdom.
Operating Segments
Our reportable segments reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building 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 process, food process 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 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.
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.

21

2017 versus 2016
Overview
The following table presents selected financial data for the fiscal years ended December 31, 2017 and 2016 (in thousands, except percentages and per share data):  
 
2017
 
2016
Revenues
$
7,686,999

 
$
7,551,524

Revenues increase from prior year
1.8
%
 
12.4
%
Restructuring expenses
$
1,577

 
$
1,438

Impairment loss on goodwill and identifiable intangible assets
$
57,819

 
$
2,428

Operating income
$
330,554

 
$
308,458

Operating income as a percentage of revenues
4.3
%
 
4.1
%
Income from continuing operations
$
228,050

 
$
185,295

Net income attributable to EMCOR Group, Inc.
$
227,196

 
$
181,935

Diluted earnings per common share from continuing operations
$
3.83

 
$
3.02

The results of our operations for 2017 set new company records in terms of revenues, operating income, net income attributable to EMCOR Group, Inc. and diluted earnings per common share from continuing operations, despite the challenges faced by our United States industrial services segment during 2017.
The increase in revenues for 2017 was primarily attributable to incremental revenues of $192.4 million generated by companies acquired in 2017 and 2016, 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. Excluding the effect of these acquisitions, revenues for 2017 decreased due to lower revenues from: (a) our United States industrial services segment, due to: (i) a decrease in large project activity from our specialty services offerings within our field services operations, (ii) the negative impact of Hurricane Harvey, which resulted in the deferral of, and may lead to the potential cancellation of, previously scheduled turnaround projects, and (iii) our industrial shop services operations and (b) our United States building services segment, primarily attributable to: (i) the loss of certain contracts not renewed pursuant to rebid within our commercial and government site-based services operations and (ii) a reduction in large project activity within their energy services operations. These decreases in revenues were partially offset by by an increase in revenues from both of our domestic construction segments and our United Kingdom building services segment.
Despite a recent increase in crude oil prices, we continue to experience a decrease in demand for new heat exchangers due to a prolonged curtailment in capital spending from customers within our United States industrial services segment. In addition, adverse market conditions and an increasingly competitive business environment within both our shop services operations and our field services operations have resulted in a decrease in our billing rates and related gross profit margins. Consequently, we have tempered our expectations regarding the strength of a near-term recovery within the United States industrial services segment and recorded a non-cash goodwill impairment charge of $57.5 million during the fourth quarter of 2017.
Operating income and operating margin (operating income as a percentage of revenues) increased within all of our reportable segments, except for our United States industrial services segment. The overall increase in operating income and operating margin was mainly attributable to the results of our domestic construction segments, which were favorably impacted by an increase in gross profit within the majority of the market sectors in which we operate. In addition, our 2016 operating results were negatively impacted by: (a) $27.9 million of aggregate losses incurred on two construction projects reported within our United States mechanical construction and facilities services segment and (b) $19.4 million of losses incurred on a transportation construction project in the Northeastern region of the United States reported within our United States electrical construction and facilities services segment. Companies acquired in 2017 and 2016 contributed incremental operating income of $3.5 million, inclusive of $10.7 million of amortization expense associated with identifiable intangible assets.
We acquired three companies during 2017. One company provides fire protection and alarm services primarily in the Southern region of the United States. The second company provides millwright services for manufacturing companies throughout the United States. Both of their results have been included in our United States mechanical construction and facilities services segment. The third company provides mobile mechanical services within the Western region of the United States, and its results have been included in our United States building services segment.
We completed the acquisition of Ardent Services, L.L.C. and Rabalais Constructors, LLC (collectively, “Ardent”) during 2016. This acquisition has been included in our United States electrical construction and facilities services segment. Ardent provides

22

electrical and instrumentation services to the energy infrastructure market in North America, and this acquisition further strengthens our position in electrical construction and services and broadens our capabilities across the industrial and energy sectors, especially in the Gulf Coast, Midwest and Western regions of the United States. Additionally during 2016, we acquired another company for an immaterial amount. This company provides mobile mechanical services within the Southeastern region of the United States, and its results have been included in our United States building services segment.
We acquired three companies in 2015, each for an immaterial amount. Two of the companies acquired primarily provide mechanical construction services, and their results of operations have been included in our United States mechanical construction and facilities services segment. The results of operations for the other company acquired have been included in our United States building services segment.
Discussion and Analysis of Results of Operations
Revenues
The following table presents our revenues for each of our operating segments and the approximate percentages that each segment’s revenues were of total revenues for the years ended December 31, 2017 and 2016 (in thousands, except for percentages):
 
 
2017
 
% of
Total 
 
2016
 
% of
Total 
Revenues from unrelated entities:
 
 
 
 
 
 
 
United States electrical construction and facilities services
$
1,829,567

 
24
%
 
$
1,704,403

 
23
%
United States mechanical construction and facilities services
2,963,815

 
39
%
 
2,643,321

 
35
%
United States building services
1,753,703

 
23
%
 
1,810,229

 
24
%
United States industrial services
799,169

 
10
%
 
1,067,315

 
14
%
Total United States operations
7,346,254

 
96
%
 
7,225,268

 
96
%
United Kingdom building services
340,745

 
4
%
 
326,256

 
4
%
Total worldwide operations
$
7,686,999

 
100
%
 
$
7,551,524

 
100
%
 
 
 
 
 
 
 
 
As described in more detail below, revenues for 2017 were $7.7 billion compared to $7.6 billion for 2016. Increases in revenues within both of our domestic construction segments and our United Kingdom building services segment were partially offset by decreases within our United States industrial services segment and our United States building services segment. The increase in revenues for 2017 was primarily attributable to incremental revenues of $192.4 million generated by companies acquired in 2017 and 2016, 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.
Revenues of our United States electrical construction and facilities services segment were $1,829.6 million for the year ended December 31, 2017 compared to revenues of $1,704.4 million for the year ended December 31, 2016. The increase in revenues was primarily attributable to an increase in revenues from commercial, institutional and healthcare construction projects. The increase in revenues within the commercial market sector was primarily a result of work performed on numerous telecommunication construction projects. The results for the year ended December 31, 2017 included $50.4 million of incremental revenues generated by the acquisition of Ardent.
Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2017 were $2,963.8 million, a $320.5 million increase compared to revenues of $2,643.3 million for the year ended December 31, 2016. The increase in revenues was primarily attributable to an increase in revenues from healthcare, commercial and hospitality construction projects. The results for the year ended December 31, 2017 included $76.2 million of incremental revenues generated by companies acquired in 2017.
Revenues of our United States building services segment were $1,753.7 million and $1,810.2 million in 2017 and 2016, respectively. The decrease in revenues was primarily attributable to: (a) the loss of certain contracts not renewed pursuant to rebid within our commercial and government site-based services operations, (b) a reduction in large project activity within its energy services operations and (c) a reduction in snow removal activities within our commercial site-based services operations. These decreases were partially offset by an increase in revenues from our mobile mechanical services operations as a result of greater project, service and controls activities. The results for the year ended December 31, 2017 included $65.8 million of incremental revenues generated by companies acquired in 2017 and 2016.

23

Revenues of our United States industrial services segment for the year ended December 31, 2017 decreased by $268.1 million compared to the year ended December 31, 2016. The decrease in revenues was attributable to decreased large project activity from our specialty services offerings within our field services operations, as well as a continued decrease in demand for new build heat exchangers from our shop services operations. In addition, this segment’s revenues were negatively impacted by Hurricane Harvey, which resulted in the deferral of, and may lead to the potential cancellation of, previously scheduled turnaround projects. Such decrease in turnaround projects also led to reduced repair work within our shop services operations.
Our United Kingdom building services segment revenues were $340.7 million in 2017 compared to $326.3 million in 2016. The increase in revenues was the result of new contract awards within the commercial and institutional market sectors, partially offset by a decrease in project activity with existing customers. This segment’s revenues were negatively impacted by $15.9 million related to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The unfavorable exchange rates for the year ended December 31, 2017 resulted, in part, from the 2016 decision by the United Kingdom to exit the European Union.
Backlog
The following table presents our operating segment backlog from unrelated entities and their respective percentages of total backlog (in thousands, except for percentages):
 
December 31, 2017
 
% of
Total
 
December 31, 2016
 
% of
Total
Backlog:
 
 
 
 
 
 
 
United States electrical construction and facilities services
$
1,148,329

 
30
%
 
$
1,221,237

 
31
%
United States mechanical construction and facilities services
1,683,718

 
44
%
 
1,818,536

 
47
%
United States building services
716,986

 
19
%
 
663,340

 
17
%
United States industrial services
61,876

 
2
%
 
50,279

 
1
%
Total United States operations
3,610,909

 
95
%
 
3,753,392

 
96
%
United Kingdom building services
179,148

 
5
%
 
149,530

 
4
%
Total worldwide operations
$
3,790,057

 
100
%
 
$
3,902,922

 
100
%
Our backlog at December 31, 2017 was $3.79 billion compared to $3.90 billion at December 31, 2016. This decrease in backlog was attributable to a decrease in backlog from our United States mechanical construction and facilities services segment and our United States electrical construction and facilities services segment. Backlog increases with awards of new contracts and decreases as we perform work on existing contracts. Backlog is not a term recognized under United States generally accepted accounting principles; however, it is a common measurement used in our industry. We include a project within our backlog at such time as a contract is awarded and agreement on contract terms has been reached. Backlog includes unrecognized revenues to be realized from uncompleted construction contracts plus unrecognized revenues expected to be realized over the remaining term of services contracts. However, we do not include in backlog contracts for which we are paid on a time and material basis and a fixed amount cannot be determined, and if the remaining term of a services contract exceeds 12 months, the unrecognized revenues attributable to such contract included in backlog are limited to only the next 12 months of revenues provided for in the contract award. Our backlog also includes amounts related to services contracts for which a fixed price contract value is not assigned when a reasonable estimate of total revenues can be made from budgeted amounts agreed to with our customers. Our backlog is 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 and (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 we consider recovery to be probable. Such claim amounts were immaterial for all periods presented. Our backlog does not include anticipated revenues from unconsolidated joint ventures or variable interest entities nor anticipated revenues from pass-through costs on contracts for which we are acting in the capacity of an agent and which are reported on the net basis. We believe our backlog is firm, although many contracts are subject to cancellation at the election of our customers. Historically, cancellations have not had a material adverse effect on us.
As discussed in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, in May 2014, an accounting pronouncement was issued by the Financial Accounting Standards Board (“FASB”) to clarify existing guidance on revenue recognition. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017, and we will adopt the standard on January 1, 2018. As part of such guidance, a company is required to disclose the amount of revenues to be recognized from remaining unsatisfied performance obligations in existing contracts. Such measure will replace our current non-GAAP backlog disclosure. Although not expected to result in a material difference as it relates to our long-term construction contracts, we believe the new guidance will result in a

24

significant decrease in backlog as it pertains to our fixed price services contracts. Under our current backlog measurement as discussed above, if the remaining term of a services contract exceeds 12 months, the unrecognized revenues attributable to such contract included in backlog are limited to only the next 12 months of revenues provided for in the contract award. However, under the GAAP measurement, revenues included in backlog for services contracts may be limited by the termination clause within such contracts, many of which are subject to cancellation or suspension on short notice at the discretion of our customers.
Cost of sales and Gross profit
The following table presents cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) for the years ended December 31, 2017 and 2016 (in thousands, except for percentages):  
 
2017
 
2016
Cost of sales
$
6,539,987

 
$
6,513,662

Gross profit
$
1,147,012

 
$
1,037,862

Gross profit margin
14.9
%
 
13.7
%
Our gross profit for the year ended December 31, 2017 was $1,147.0 million, a $109.2 million increase compared to gross profit of $1,037.9 million for the year ended December 31, 2016. Our gross profit margin was 14.9% and 13.7% for 2017 and 2016, respectively. Gross profit and gross profit margin were favorably impacted by improved operating performance within all of our reportable segments, except for our United States industrial services segment. Gross profit and gross profit margin within our United States mechanical construction and facilities services segment for the year ended December 31, 2017 were favorably impacted by the recovery of certain contract costs previously disputed on a project that was completed in 2016, resulting in $18.1 million of gross profit and a 0.2% favorable impact on the Company’s gross profit margin. In addition, the Company’s gross profit and gross profit margin for the year ended December 31, 2016 were negatively impacted by $47.3 million of losses incurred on the three construction projects previously referenced, which resulted in a 0.8% negative impact on the Company’s gross profit margin for the prior year.
Selling, general and administrative expenses
The following table presents selling, general and administrative expenses and SG&A margin (selling, general and administrative expenses as a percentage of revenues) for the years ended December 31, 2017 and 2016 (in thousands, except for percentages):  
 
2017
 
2016
Selling, general and administrative expenses
$
757,062

 
$
725,538

Selling, general and administrative expenses as a percentage of revenues
9.8
%
 
9.6
%
Our selling, general and administrative expenses for the year ended December 31, 2017 were $757.1 million, a $31.5 million increase compared to selling, general and administrative expenses of $725.5 million for the year ended December 31, 2016. Selling, general and administrative expenses as a percentage of revenues were 9.8% and 9.6% for 2017 and 2016, respectively. The increase in selling, general and administrative expenses for the year ended December 31, 2017 included $24.4 million of incremental expenses directly related to companies acquired in 2017 and 2016, including amortization expense attributable to identifiable intangible assets of $3.9 million. In addition to the impact of acquisitions, selling, general and administrative expenses increased due to: (a) an increase in salaries, primarily within our United States mechanical construction and facilities segment, partially as a result of an increase in headcount due to higher revenues compared to the prior year, (b) an increase in incentive compensation expense due to higher annual operating results than in the same prior year period, which resulted in increased accruals for certain of our incentive compensation plans, and (c) an increase in employee healthcare costs. Our selling, general and administrative expenses for the year ended December 31, 2016 included $3.8 million of transaction costs associated with the acquisition of Ardent. The increase in SG&A margin for the year ended December 31, 2017 was due to: (a) unabsorbed overhead costs within our United States industrial services segment due to the deferral of certain turnaround activity as a result of Hurricane Harvey and (b) an increase in both the provision for doubtful accounts and employee healthcare costs.
Restructuring expenses
Restructuring expenses, primarily relating to severance obligations, were $1.6 million and $1.4 million for 2017 and 2016, respectively. As of December 31, 2017 and 2016, the balance of restructuring related obligations yet to be paid was $0.5 million and $0.2 million, respectively. The majority of obligations outstanding as of December 31, 2016 were paid during 2017. The obligations outstanding as of December 31, 2017 will be paid throughout 2018. No material expenses in connection with restructuring from continuing operations are expected to be incurred during 2018.


25

Impairment loss on goodwill and identifiable intangible assets
In conjunction with our 2017 annual impairment test on October 1, we recognized a $57.8 million non-cash impairment charge. Of this amount, $57.5 million related to goodwill within our United States industrial services segment and $0.3 million related to a subsidiary trade name within the United States building services segment. The goodwill impairment primarily resulted from both lower forecasted revenues and operating margins from our United States industrial services segment, which has been adversely affected by poor market conditions, predominately within its shop services operations due to: (a) a prolonged curtailment in capital spending from customers, (b) increased foreign competition and (c) economic uncertainty within certain South American markets which has caused us to limit our pursuit of opportunities within such countries. The subsidiary trade name impairment resulted from lower forecasted revenues from a company within our United States building services segment.
In conjunction with our 2016 annual impairment test on October 1, we recognized a $2.4 million non-cash impairment charge related to a subsidiary trade name within the United States mechanical construction and facilities services segment. The 2016 impairment resulted from a decrease in the hypothetical royalty rate and lower forecasted revenues from a company within this segment. No impairment of our goodwill was recognized for the year ended December 31, 2016.
Operating income (loss)
The following table presents by segment our operating income (loss) and each segment’s operating income (loss) as a percentage of such segment’s revenues from unrelated entities for the years ended December 31, 2017 and 2016 (in thousands, except for percentages):
 
 
2017
 
% of
Segment
Revenues 
 
2016
 
% of
Segment
Revenues 
Operating income (loss):
 
 
 
 
 
 
 
United States electrical construction and facilities services
$
150,001

 
8.2
%
 
$
101,761

 
6.0
%
United States mechanical construction and facilities services
212,320

 
7.2
%
 
132,667

 
5.0
%
United States building services
81,504

 
4.6
%
 
76,845

 
4.2
%
United States industrial services
19,084

 
2.4
%
 
77,845

 
7.3
%
Total United States operations
462,909

 
6.3
%
 
389,118

 
5.4
%
United Kingdom building services
14,849

 
4.4
%
 
11,946

 
3.7
%
Corporate administration
(87,808
)
 
—

 
(88,740
)
 
—

Restructuring expenses
(1,577
)
 
—

 
(1,438
)
 
—

Impairment loss on goodwill and identifiable intangible assets
(57,819
)
 
—

 
(2,428
)
 
—

Total worldwide operations
330,554

 
4.3
%
 
308,458

 
4.1
%
Other corporate items:
 

 
 

 
 

 
 

Interest expense
(12,770
)
 
 

 
(12,627
)
 
 

Interest income
965

 
 

 
663

 
 

Income from continuing operations before income taxes
$
318,749

 
 

 
$
296,494

 
 

As described in more detail below, we had operating income of $330.6 million for 2017 compared to operating income of $308.5 million for 2016. Operating margin was 4.3% and 4.1% for 2017 and 2016, respectively. Operating income for the year ended December 31, 2017 included a $57.8 million non-cash impairment charge, which resulted in a 0.8% negative impact on the Company’s operating margin. Operating income and operating margin for the year ended December 31, 2017 benefited from the recovery of certain contract costs previously disputed on a project completed in 2016 within our United States mechanical construction and facilities services segment, which resulted in a 0.2% favorable impact on the Company’s operating margin.
The Company’s operating income and operating margin for the year ended December 31, 2016 were negatively impacted by $47.3 million of losses incurred on the three construction projects previously referenced, which resulted in a 0.7% negative impact on the Company’s operating margin for the prior year.
Operating income of our United States electrical construction and facilities services segment for the year ended December 31, 2017 was $150.0 million compared to operating income of $101.8 million for the year ended December 31, 2016. The increase in operating income was attributable to an increase in gross profit from: (a) the commercial market sector, primarily as a result of work performed on numerous telecommunication construction projects, (b) the transportation market sector, due to large project activity, and (c) construction projects within the institutional market sector. In addition, the results for the year ended December 31, 2016 included losses of $19.4 million incurred on a construction project in the Northeastern United States. The increase in

26

operating margin for the year ended December 31, 2017 was attributable to improved operating performance, partially as a result of increased gross profit margin from numerous construction projects within the commercial and transportation market sectors. Operating margin for the year ended December 31, 2016 was negatively impacted by 1.2% as a result of the losses incurred on the construction project previously referenced. From January 1, 2017 to April 15, 2017, Ardent incurred an operating loss of $1.8 million, inclusive of $0.9 million of amortization expense associated with identifiable intangible assets. As previously discussed under “Impact of Acquisitions”, these amounts represent Ardent’s operating results in the current reported period only for the time period Ardent was not owned by EMCOR in the comparable prior reported period.
Our United States mechanical construction and facilities services segment operating income for the year ended December 31, 2017 was $212.3 million, a $79.7 million increase compared to operating income of $132.7 million for the year ended December 31, 2016. The increase in operating income for the year ended December 31, 2017 was attributable to an increase in gross profit from the majority of the market sectors in which we operate. Additionally, this segment’s operating income benefited from the recovery of certain contract costs previously disputed on a project completed in 2016, which resulted in $18.1 million of gross profit. Companies acquired in 2017 contributed incremental operating income of $2.7 million, inclusive of $8.3 million of amortization expense associated with identifiable intangible assets. The increase in operating margin for the year ended December 31, 2017 was attributable to an increase in gross profit margin. The recovery of the previously disputed contract costs discussed above favorably impacted this segment’s operating margin by 0.6% for the year ended December 31, 2017.
Operating income of our United States building services segment was $81.5 million and $76.8 million in 2017 and 2016, respectively. The increase in operating income for the year ended December 31, 2017 was due to increases in operating income from: (a) our mobile mechanical services operations, as a result of increases in gross profit from project, service and control activities, and (b) our energy services operations. The increase in operating income for our energy services operations primarily resulted from improved project execution, as the results for the year ended December 31, 2016 included a loss incurred on a large project. Additionally, companies acquired in 2017 and 2016 within our mobile mechanical services operations, contributed incremental operating income of $2.6 million, inclusive of $1.5 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2017. The increase in operating income for the year ended December 31, 2017 was partially offset by a decrease in gross profit from our commercial site-based services operations partially due to: (a) the loss of certain contracts not renewed pursuant to rebid and (b) a reduction in snow removal activities. The increase in operating margin for the year ended December 31, 2017 was attributable to an increase in gross profit margin.
Operating income of our United States industrial services segment for the year ended December 31, 2017 was $19.1 million, a $58.8 million decrease compared to operating income of $77.8 million for the year ended December 31, 2016. The decrease in operating income for the year ended December 31, 2017 was attributable to a decrease in gross profit from: (a) our specialty services offerings within our field services operations, as a result of reduced large project activity, (b) a decrease in turnaround activity from our field services operations, partially due to Hurricane Harvey, which resulted in the deferral of, and may lead to the potential cancellation of, previously scheduled turnaround projects, and (c) the mix of work in our industrial shop services operations, which included fewer repair projects that generate higher gross profit margins. The decrease in operating margin was attributable to a decrease in gross profit margin and an increase in the ratio of selling, general and administrative expenses to revenues. The increase in SG&A margin for the year ended December 31, 2017 was partially the result of unabsorbed overhead costs as a result of the project deferrals due to Hurricane Harvey and lower specialty services revenues.
Our United Kingdom building services segment’s operating income for the year ended December 31, 2017 was $14.8 million compared to operating income of $11.9 million for the year ended December 31, 2016. Operating income increased primarily due to an increase in gross profit from new contract awards, partially offset by a decrease in gross profit from project activity. This segment’s results included a decrease in operating income of $0.3 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The increase in operating margin for the year ended December 31, 2017 was attributable to an increase in gross profit margin and a decrease in SG&A margin.
Our corporate administration operating loss was $87.8 million for 2017 compared to $88.7 million in 2016. The decrease in corporate administration expenses for the year ended December 31, 2017 was primarily due to a decrease in professional fees, as the prior year included $3.8 million of transaction costs associated with the acquisition of Ardent. The decrease was partially offset by an increase in software licensing costs and incentive compensation expense.
Non-operating items
Interest expense was $12.8 million and $12.6 million for 2017 and 2016, respectively. The increase in interest expense was primarily due to increased average outstanding borrowings in 2017 and a higher United States dollar LIBOR rate. Interest income was $1.0 million and $0.7 million for 2017 and 2016, respectively.

27

For joint ventures that have been accounted for using the consolidation method of accounting, noncontrolling interests represent the allocation of earnings to our joint venture partners who either have a minority-ownership interest in the joint venture or are not at risk for the majority of losses of the joint venture.
Our 2017 income tax provision from continuing operations was $90.7 million compared to $111.2 million for 2016. The actual income tax rates on income from continuing operations before income taxes, less amounts attributable to noncontrolling interests, for the years ended December 31, 2017 and 2016, were 28.5% and 37.5%, respectively. The decrease in the 2017 income tax provision compared to 2016 was predominantly due to the revaluation of the Company’s net deferred tax liability balances, partially offset by increased income before income taxes.
Discontinued operations
During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented in the Consolidated Financial Statements as discontinued operations.
2016 versus 2015    
Overview
The following table presents selected financial data for the fiscal years ended December 31, 2016 and 2015 (in thousands, except percentages and per share data):  
 
2016
 
2015
Revenues
$
7,551,524

 
$
6,718,726

Revenues increase from prior year
12.4
%
 
4.6
%
Restructuring expenses
$
1,438

 
$
824

Impairment loss on identifiable intangible assets
$
2,428

 
$
—

Operating income
$
308,458

 
$
287,082

Operating income as a percentage of revenues
4.1
%
 
4.3
%
Income from continuing operations
$
185,295

 
$
172,567

Net income attributable to EMCOR Group, Inc.
$
181,935

 
$
172,286

Diluted earnings per common share from continuing operations
$
3.02

 
$
2.72

Our 2016 results included increased revenues from all of our reportable segments, except for our United Kingdom building services segment. The increase in revenues for 2016 was primarily attributable to: (a) our domestic construction segments, due to increased activity within the majority of the market sectors in which we operate, (b) our United States industrial services segment, as a result of increased demand for specialty services offerings within our field services operations, and (c) our United States building services segment, primarily due to higher volume within our mobile mechanical services operations. In addition, companies acquired in 2016 and 2015, 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 $250.8 million for the year ended December 31, 2016.
The increase in operating income was attributable to improved operating performance within all of our reportable segments, except for our United States mechanical construction and facilities services segment. Our operating income was favorably impacted by: (a) our United States industrial services segment, as a result of large project activity within our field services operations, (b) our United States electrical construction and facilities services segment, primarily attributable to an increase in gross profit from commercial, transportation and hospitality construction projects, and (c) our United States building services segment, as a result of increased gross profit within our mobile mechanical services operations. In addition, companies acquired in 2016 and 2015 generated incremental operating income of $14.3 million, inclusive of $4.1 million of amortization expense associated with identifiable intangible assets. Our 2016 operating results were negatively impacted by: (a) $27.9 million of aggregate losses incurred on two construction projects reported within our United States mechanical construction and facilities services segment and (b) $19.4 million of losses incurred on a transportation construction project in the Northeastern region of the United States reported within our United States electrical construction and facilities services segment. These three projects were substantially complete at the end of 2016. Corporate administration operating loss increased as a result of: (a) an increase in employment costs, such as incentive compensation and salaries, (b) $3.8 million of transaction costs associated with the acquisition of Ardent in April 2016, (c) an increase in certain non-income related taxes and (d) an increase in software licensing costs and legal costs.

28

Our operating margin (operating income as a percentage of revenues) was 4.1% and 4.3% for 2016 and 2015, respectively. The decrease in operating margin was attributable to the cumulative impact of the three construction projects previously referenced, which incurred losses of $47.3 million. These three projects resulted in a 0.7% negative impact on the Company’s operating margin for 2016.
Discussion and Analysis of Results of Operations
Revenues
The following table presents our revenues for each of our operating segments and the approximate percentages that each segment’s revenues were of total revenues for the years ended December 31, 2016 and 2015 (in thousands, except for percentages):
 
2016
 
% of
Total 
 
2015
 
% of
Total 
Revenues from unrelated entities:
 
 
 
 
 
 
 
United States electrical construction and facilities services
$
1,704,403

 
23
%
 
$
1,367,142

 
20
%
United States mechanical construction and facilities services
2,643,321

 
35
%
 
2,293,038

 
34
%
United States building services
1,810,229

 
24
%
 
1,758,984

 
26
%
United States industrial services
1,067,315

 
14
%
 
922,085

 
14
%
Total United States operations
7,225,268

 
96
%
 
6,341,249

 
94
%
United Kingdom building services
326,256

 
4
%
 
377,477

 
6
%
Total worldwide operations
$
7,551,524

 
100
%
 
$
6,718,726

 
100
%
 
 
 
 
 
 
 
 
As described in more detail below, revenues for 2016 were $7.6 billion compared to $6.7 billion for 2015.
Revenues of our United States electrical construction and facilities services segment were $1,704.4 million for the year ended December 31, 2016 compared to revenues of $1,367.1 million for the year ended December 31, 2015. Excluding the acquisition of Ardent, the increase in revenues was primarily attributable to an increase in revenues from commercial, transportation and hospitality construction projects, partially offset by a decrease in revenues from manufacturing and healthcare construction projects. The results for the year ended December 31, 2016 included $158.5 million of revenues generated by Ardent.
Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2016 were $2,643.3 million, a $350.3 million increase compared to revenues of $2,293.0 million for the year ended December 31, 2015. The increase in revenues was attributable to an increase in activity within the majority of the market sectors in which we operate. The results for the year ended December 31, 2016 included $45.9 million of incremental revenues generated by companies acquired in 2015.
Revenues of our United States building services segment were $1,810.2 million and $1,759.0 million in 2016 and 2015, respectively. The increase in revenues was primarily attributable to increased revenues from: (a) our mobile mechanical services operations as a result of greater project, service and controls activities and (b) our energy services operations, as a result of an increase in large project activity. The results for the year ended December 31, 2016 included $46.4 million of revenues generated by a company acquired in 2016. These increases were partially offset by a decrease in revenues from our government and commercial site-based services operations as a result of the loss of certain contracts not renewed pursuant to rebid, and in the case of our government site-based services operations, the result of certain scope reductions within their current contract portfolio.
Revenues of our United States industrial services segment for the year ended December 31, 2016 increased by $145.2 million compared to the year ended December 31, 2015. The increase in revenues was primarily due to increased demand for specialty services offerings within our field services operations, including large project activity. The increase in revenues from our field services operations was partially offset by a decrease in revenues from our shop services operations due to lower demand for new heat exchangers as a result of the continued curtailment in capital spending by many large integrated oil companies. In addition, revenues for the first half of 2015 were negatively impacted by a nationwide strike by union employees of certain major oil refineries which led to the cancellation of certain turnaround projects.
Our United Kingdom building services segment revenues were $326.3 million in 2016 compared to $377.5 million in 2015. This segment’s revenues decreased by $41.0 million for the year ended December 31, 2016 related to the effect of unfavorable exchange rates for the British pound versus the United States dollar resulting, in part, from the decision by the United Kingdom to exit the European Union. In addition, the decrease in this segment’s revenues was partially attributable to a decrease in small project activity within the institutional market sector.


29

Backlog
The following table presents our operating segment backlog from unrelated entities and their respective percentages of total backlog (in thousands, except for percentages):
 
December 31, 2016
 
% of
Total
 
December 31, 2015
 
% of
Total
Backlog:
 
 
 
 
 
 
 
United States electrical construction and facilities services
$
1,221,237

 
31
%
 
$
1,145,791

 
30
%
United States mechanical construction and facilities services
1,818,536

 
47
%
 
1,679,211

 
45
%
United States building services
663,340

 
17
%
 
766,486

 
20
%
United States industrial services
50,279

 
1
%
 
54,578

 
1
%
Total United States operations
3,753,392

 
96
%
 
3,646,066

 
97
%
United Kingdom building services
149,530

 
4
%
 
125,097

 
3
%
Total worldwide operations
$
3,902,922

 
100
%
 
$
3,771,163

 
100
%
Our backlog at December 31, 2016 was $3.90 billion compared to $3.77 billion at December 31, 2015. This increase in backlog was primarily attributable to an increase in backlog from all of our reportable segments, except for our United States building services segment and our United States industrial services segment.
Cost of sales and Gross profit
The following table presents cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) for the years ended December 31, 2016 and 2015 (in thousands, except for percentages):  
 
2016
 
2015
Cost of sales
$
6,513,662

 
$
5,774,247

Gross profit
$
1,037,862

 
$
944,479

Gross profit margin
13.7
%
 
14.1
%
Our gross profit for the year ended December 31, 2016 was $1,037.9 million, a $93.4 million increase compared to gross profit of $944.5 million for the year ended December 31, 2015. Our gross profit margin was 13.7% and 14.1% for 2016 and 2015, respectively. The increase in gross profit was attributable to increases in gross profit within all of our reportable segments, except for our United Kingdom building services segment. The decrease in gross profit margin was attributable to the cumulative impact of the three construction projects previously referenced, which incurred losses of $47.3 million. These three projects resulted in a 0.8% negative impact on the Company’s gross profit margin for 2016.
Selling, general and administrative expenses
The following table presents selling, general and administrative expenses and SG&A margin, for the years ended December 31, 2016 and 2015 (in thousands, except for percentages):  
 
2016
 
2015
Selling, general and administrative expenses
$
725,538

 
$
656,573

Selling, general and administrative expenses as a percentage of revenues
9.6
%
 
9.8
%
Our selling, general and administrative expenses for the year ended December 31, 2016 were $725.5 million, a $69.0 million increase compared to selling, general and administrative expenses of $656.6 million for the year ended December 31, 2015. Selling, general and administrative expenses as a percentage of revenues were 9.6% and 9.8% for 2016 and 2015, respectively. The increase in selling, general and administrative expenses for the year ended December 31, 2016 included $30.3 million of incremental expenses directly related to companies acquired in 2016 and 2015, including amortization expense attributable to identifiable intangible assets of $3.4 million. Additionally, selling, general and administrative expenses included $3.8 million of transaction costs associated with the acquisition of Ardent in April 2016. Excluding the impact of acquisitions, the increase in selling, general and administrative expenses was primarily due to higher employee related costs such as incentive compensation, salaries and commissions. Increased incentive compensation was principally due to higher annual operating results than in the same prior year period, which resulted in increased accruals for certain of our incentive compensation plans. The increase in salaries was attributable to an increase in headcount due to higher revenues than in the same prior year period, as well as cost of living adjustments and merit pay increases. The increase in selling, general and administrative expenses was also due to increases in the provision for

30

doubtful accounts, information technology costs and certain non-income related taxes. The decrease in SG&A margin was partially attributable to an increase in revenues without commensurate increases in our overhead cost structure.
Restructuring expenses
Restructuring expenses, primarily relating to severance obligations, were $1.4 million and $0.8 million for 2016 and 2015, respectively. As of December 31, 2016 and 2015, the balance of restructuring related obligations yet to be paid was $0.2 million and $0.1 million, respectively. The majority of obligations outstanding as of December 31, 2016 and December 31, 2015 were paid during 2017 and 2016, respectively.
Impairment loss on goodwill and identifiable intangible assets
In conjunction with our 2016 annual impairment test on October 1, we recognized a $2.4 million non-cash impairment charge related to a subsidiary trade name within the United States mechanical construction and facilities services segment. The 2016 impairment resulted from a decrease in the hypothetical royalty rate and lower forecasted revenues from a company within this segment. No impairment of our identifiable intangible assets was recognized for the year ended December 31, 2015. Additionally, no impairment of our goodwill was recognized for the years ended December 31, 2016 and 2015.
Operating income (loss)
The following table presents by segment our operating income (loss) and each segment’s operating income (loss) as a percentage of such segment’s revenues from unrelated entities for the years ended December 31, 2016 and 2015 (in thousands, except for percentages):
 
 
2016
 
% of
Segment
Revenues 
 
2015
 
% of
Segment
Revenues 
Operating income (loss):
 
 
 
 
 
 
 
United States electrical construction and facilities services
$
101,761

 
6.0
%
 
$
82,225

 
6.0
%
United States mechanical construction and facilities services
132,667

 
5.0
%
 
138,444

 
6.0
%
United States building services
76,845

 
4.2
%
 
70,776

 
4.0
%
United States industrial services
77,845

 
7.3
%
 
56,469

 
6.1
%
Total United States operations
389,118

 
5.4
%
 
347,914

 
5.5
%
United Kingdom building services
11,946

 
3.7
%
 
11,634

 
3.1
%
Corporate administration
(88,740
)
 
—

 
(71,642
)
 
—

Restructuring expenses
(1,438
)
 
—

 
(824
)
 
—

Impairment loss on identifiable intangible assets
(2,428
)
 
—

 
—

 
—

Total worldwide operations
308,458

 
4.1
%
 
287,082

 
4.3
%
Other corporate items:
 

 
 

 
 

 
 

Interest expense
(12,627
)
 
 

 
(8,932
)
 
 

Interest income
663

 
 

 
673

 
 

Income from continuing operations before income taxes
$
296,494

 
 

 
$
278,823

 
 

As described in more detail below, we had operating income of $308.5 million for 2016 compared to operating income of $287.1 million for 2015. Operating margin was 4.1% and 4.3% for 2016 and 2015, respectively. The decrease in operating margin was attributable to the cumulative impact of three construction projects, which incurred losses of $47.3 million. These projects resulted in a 0.7% negative impact on the Company’s operating margin for 2016.
Operating income of our United States electrical construction and facilities services segment for the year ended December 31, 2016 was $101.8 million compared to operating income of $82.2 million for the year ended December 31, 2015. The increase in operating income was partially attributable to an increase in gross profit from commercial, transportation and hospitality construction contracts. The increase in operating income was also partially attributable to the acquisition of Ardent, which contributed operating income of $8.1 million, inclusive of $2.1 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2016. Operating income was negatively impacted by a transportation construction project in the Northeastern region of the United States, which incurred losses of $19.4 million as a result of productivity issues attributable to unfavorable job-site conditions. This project resulted in a 1.2% negative impact on the segment’s operating margin for the year ended December 31, 2016. This project was substantially complete at the end of 2016.

31

Our United States mechanical construction and facilities services segment operating income for the year ended December 31, 2016 was $132.7 million, a $5.8 million decrease compared to operating income of $138.4 million for the year ended December 31, 2015. This segment’s operating results were negatively impacted by: (a) $18.3 million of losses incurred on a project at a process facility in the Western region of the United States, as a result of a contract dispute with our customer, and (b) $9.6 million of losses incurred throughout 2016 on an institutional construction project in the Southern region of the United States, due to project delays and unfavorable job-site conditions. These projects were substantially complete at the end of 2016. Additionally, the results for 2015 included revenues of $12.1 million recognized as a result of the settlement of a claim on an institutional project located in the Southeastern region of the United States. The decrease in operating income was partially offset by an increase in gross profit from commercial and hospitality construction projects. Additionally, the results for the year ended December 31, 2016 included the receipt of $2.0 million from the former owner of a company we had previously acquired as a result of a settlement of a claim by us under the acquisition agreement. Companies acquired in 2015 generated incremental operating income of $3.4 million, inclusive of $0.6 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2016. The decrease in operating margin was attributable to the cumulative impact of the two projects previously referenced, which resulted in a 1.2% negative impact on this segment’s operating margin for 2016.
Operating income of our United States building services segment was $76.8 million and $70.8 million in 2016 and 2015, respectively. The increase in operating income was primarily attributable to an increase in gross profit from project, service and controls activities within our mobile mechanical services operations. Additionally, a company acquired during the second quarter of 2016, within our mobile mechanical services operations, generated operating income of $2.8 million, inclusive of $1.4 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2016. The increase in operating margin for the year ended December 31, 2016 was attributable to an increase in gross profit margin.
Operating income of our United States industrial services segment for the year ended December 31, 2016 increased by $21.4 million compared to operating income for the year ended December 31, 2015. The increase in operating income was primarily attributable to an increase in gross profit from specialty services offerings within our field services operations, including large project activity. In addition, this segment’s results for the first half of 2015 were negatively impacted by a nationwide strike by union employees of certain major oil refineries, which led to the cancellation of certain turnaround projects. The increase in operating income was partially offset by a decrease in gross profit from our shop services operations due to lower demand for new heat exchangers as a result of the continued curtailment in capital spending by many large integrated oil companies. The increase in operating margin was attributable to a decrease in the ratio of selling, general and administrative expenses to revenues.
Our United Kingdom building services segment’s operating income for the year ended December 31, 2016 was $11.9 million compared to operating income of $11.6 million for the year ended December 31, 2015. The increase in operating income was primarily attributable to an increase in gross profit from project activity within the commercial market sector, partially as a result of several contract awards won in 2015, offset in part by a decrease of $1.5 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The increase in operating margin was attributable to an increase in gross profit margin.
Our corporate administration operating loss was $88.7 million for 2016 compared to $71.6 million in 2015. The increase in expenses for the year ended December 31, 2016 was primarily due to: (a) an increase in employment costs, such as incentive compensation, primarily due to higher annual operating results in 2016 compared to the same prior year period, (b) an increase in certain non-income related taxes, (c) an increase in software licensing costs and (d) an increase in legal costs. Additionally, operating results for the year ended December 31, 2016 included $3.8 million of transaction costs associated with the acquisition of Ardent in April 2016.
Non-operating items
Interest expense was $12.6 million and $8.9 million for 2016 and 2015, respectively. The increase in interest expense was primarily due to increased outstanding borrowings to fund acquisitions. Interest income was $0.7 million for both 2016 and 2015.
For joint ventures that have been accounted for using the consolidation method of accounting, noncontrolling interests represent the allocation of earnings to our joint venture partners who either have a minority-ownership interest in the joint venture or are not at risk for the majority of losses of the joint venture.
Our 2016 income tax provision from continuing operations was $111.2 million compared to $106.3 million for 2015. The actual income tax rates on income from continuing operations before income taxes, less amounts attributable to noncontrolling interests, for the years ended December 31, 2016 and 2015, were 37.5% and 38.1%, respectively. The increase in the 2016 income tax provision compared to 2015 was predominantly due to the effect of increased income before income taxes and certain increases in the state tax provision attributable to the mix of earnings.


32

Liquidity and Capital Resources
The following table presents net cash provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2017, 2016 and 2015 (in thousands):

 
2017
 
2016
 
2015
Net cash provided by operating activities
$
366,134

 
$
264,561

 
$
266,666

Net cash used in investing activities
$
(138,093
)
 
$
(270,671
)
 
$
(59,808
)
Net cash used in financing activities
$
(228,470
)
 
$
(9,429
)
 
$
(149,473
)
Effect of exchange rate changes on cash and cash equivalents
$
3,242

 
$
(6,675
)
 
$
(2,610
)
Our consolidated cash balance increased by approximately $2.8 million from $464.6 million at December 31, 2016 to $467.4 million at December 31, 2017. Net cash provided by operating activities for 2017 was $366.1 million compared to $264.6 million of net cash provided by operating activities for 2016. The increase in cash provided by operating activities was primarily due to a $45.0 million increase in net income and improved cash flows from accounts payable. Net cash used in investing activities was $138.1 million for 2017 compared to net cash used in investing activities of $270.7 million for 2016. The decrease in net cash used in investing activities was primarily due to a reduction in payments for acquisitions of businesses. Net cash flows from financing activities for 2017 decreased by approximately $219.0 million compared to 2016 primarily as a result of net borrowings made under our credit agreements in 2016. Cash flows from discontinued operations were immaterial and are not expected to significantly affect future liquidity.
Our consolidated cash balance decreased by approximately $22.2 million from $486.8 million at December 31, 2015 to $464.6 million at December 31, 2016. Net cash provided by operating activities for 2016 was $264.6 million compared to $266.7 million of net cash provided by operating activities for 2015. The decrease in cash provided by operating activities was primarily due to a reduction in cash flows from changes in inventory balances, partially offset by improved cash flows from net over-billings related to the timing of customer billings and payments. Net cash used in investing activities was $270.7 million for 2016 compared to net cash used in investing activities of $59.8 million for 2015. The increase in cash used in investing activities was primarily due to the increase in payments to acquire businesses and property, plant and equipment. Net cash used in financing activities for 2016 decreased by approximately $140.0 million compared to 2015. The decrease in net cash used in financing activities was primarily due to net borrowings of $125.0 million under our revolving credit facility, a decrease in funds used for the repurchase of common stock and a decrease in distributions to noncontrolling interests, partially offset by a decrease in proceeds from the exercise of stock options.
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
Revolving credit facility (including interest at 2.57%) (1)
$
27.3

 
$
0.6

 
$
1.3

 
$
25.4

 
$
—

Term Loan (including interest at 2.69%) (1)
310.3

 
22.9

 
44.4

 
243.0

 
—

Capital lease obligations
4.7

 
1.5

 
2.8

 
0.4

 
—

Operating leases
303.1

 
73.4

 
115.8

 
65.4

 
48.5

Open purchase obligations (2)
1,063.6

 
971.5

 
91.3

 
0.8

 
—

Other long-term obligations, including current portion (3)
375.2

 
66.2

 
299.1

 
9.9

 
—

Liabilities related to uncertain income tax positions (4)
0.9

 
—

 
—

 
—

 
0.9

Total Contractual Obligations
$
2,085.1

 
$
1,136.1

 
$
554.7

 
$
344.9

 
$
49.4

 
 
 
 
 
 
 
 
 
 
 


33

 
Amount of Commitment Expirations by Period 
Other Commercial Commitments
Total
Amounts
Committed 
 
Less
than
1 year
 
1-3
years 
 
3-5
years
 
After
5 years
Letters of credit
$
110.6

 
$
110.6

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 

_________
 
(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”). The proceeds of the 2016 Term Loan were used to repay amounts drawn under our prior credit agreement. As of December 31, 2017, the amount outstanding under the 2016 Term Loan was $284.8 million. As of December 31, 2017, there were borrowings outstanding of $25.0 million under the 2016 Revolving Credit Facility.
(2)
Represents open purchase orders for material and subcontracting costs related to construction and service contracts. These purchase orders are not reflected in the Consolidated Balance Sheets and should not impact future cash flows, as amounts should be recovered through customer billings.
(3)
Represents primarily 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, but 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 estimates of 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.
(4)
Includes $0.1 million of accrued interest.
Until August 3, 2016, we had a credit agreement dated as of November 25, 2013 (as amended, the “2013 Credit Agreement”), which provided for a revolving credit facility of $750.0 million (the “2013 Revolving Credit Facility”) and a term loan of $350.0 million (the “2013 Term Loan”). On August 3, 2016, we amended and restated the 2013 Credit Agreement to provide 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. The proceeds of the 2016 Term Loan were used to repay amounts drawn under the 2013 Term Loan, as well as a portion of the outstanding balance under the 2013 Revolving Credit Facility. 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 December 31, 2017 and December 31, 2016. 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 December 31, 2017. 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 (1.57% and 1.69% at December 31, 2017 for our 2016 Revolving Credit Facility and our 2016 Term Loan, respectively) 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 (4.50% at December 31, 2017), (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 rates in effect at December 31, 2017 were 2.57% and 2.69% for our 2016 Revolving Credit Facility and our 2016 Term Loan, respectively. 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. During 2016, we capitalized an additional $3.0 million of debt issuance costs associated with the 2016 Credit Agreement. 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 ending 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 December 31, 2017 and December 31, 2016, the balance of the 2016 Term Loan was $284.8 million and $315.0 million, respectively. As of December 31, 2017 and December 31, 2016, we had approximately $110.1 million and $91.9

34

million of letters of credit outstanding, respectively. There were $25.0 million and $125.0 million in borrowings outstanding under the 2016 Revolving Credit Facility as of December 31, 2017 and December 31, 2016, respectively.
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 December 31, 2017, based on our percentage-of-completion of projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $927.3 million, which represents approximately 24% of our total backlog. The 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 from us amounts ranging from a few thousand dollars to over $10.0 million. 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 authorized us to repurchase up to $100.0 million of our outstanding common stock. On December 5, 2013, October 23, 2014, October 28, 2015 and October 25, 2017, our Board of Directors authorized us to repurchase up to an additional $100.0 million, $250.0 million, $200.0 million and $100.0 million of our outstanding common stock, respectively. During 2017, we repurchased approximately 1.4 million shares of our common stock for approximately $90.8 million. Since the inception of the repurchase programs through December 31, 2017, we have repurchased approximately 12.8 million shares of our common stock for approximately $575.2 million. As of December 31, 2017, there remained authorization for us to repurchase approximately $174.8 million of our shares. The repurchase programs have no expiration date and do 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. The repurchase programs have 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 seize opportunities 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 been typically 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

35

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 maintain a net over-billed position with our customers, there can be no assurance that a net over-billed position can be maintained. Our net over-billings, defined as the balance sheet accounts “Billings in excess of costs and estimated earnings on uncompleted contracts” less “Cost and estimated earnings in excess of billings on uncompleted contracts”, were $401.5 million and $358.5 million as of December 31, 2017 and 2016, respectively.
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.
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 our short-term and foreseeable long-term liquidity and meet our expected capital expenditure requirements.
Certain Insurance Matters
As of December 31, 2017 and 2016, we utilized approximately $109.7 million and $91.5 million, respectively, of letters of credit obtained under our 2016 Revolving Credit Facility as collateral for insurance obligations.
New Accounting Pronouncements
We review new accounting standards to determine the expected impact, if any, that the adoption of such standards will have on our financial position and/or results of operations. See Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations or liquidity.
Application of Critical Accounting Policies
Our consolidated financial statements are based on the application of significant accounting policies, which require management to make 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. Financial Statements and Supplementary Data of this Form 10-K. 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 (i) long-term construction contracts for which the percentage-of-completion method of accounting is used and (ii) services contracts; (b) collectibility or valuation of accounts receivable; (c) insurance liabilities; (d) income taxes; and (e) goodwill and identifiable intangible assets.
Revenue Recognition from Long-term Construction Contracts and Services Contracts
We believe our most critical accounting policy is revenue recognition from long-term construction contracts for which we use the percentage-of-completion method of accounting. Percentage-of-completion accounting is the prescribed method of accounting for long-term contracts in accordance with Accounting Standards Codification (“ASC”) Topic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts”, and, accordingly, is the method used for revenue recognition within our industry. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Certain of our electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Pre-contract costs from our construction projects are generally expensed as incurred. Application of percentage-of-completion accounting results in the recognition of costs and estimated earnings in excess of billings on uncompleted contracts in the Consolidated Balance Sheets. Costs and estimated earnings in excess of billings on uncompleted contracts reflected in the Consolidated Balance Sheets arise when revenues have been recognized but the amounts cannot be billed under the terms of contracts. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract.
Costs and estimated earnings in excess of billings on uncompleted contracts also include amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders in dispute or unapproved as to both scope and price or other customer-related causes of unanticipated additional contract costs (claims and unapproved

36

change orders). Such amounts are recorded at estimated net realizable value and take into account factors that may affect our ability to bill and ultimately collect unbilled revenues. The profit associated with claim amounts is not recognized until the claim has been settled and payment has been received. During 2017, we recognized $18.1 million of gross profit associated with the recovery of certain contract costs previously disputed on a project completed in the prior year. There were no other significant settlements or payments of claims in 2017 and 2016. As of December 31, 2017 and 2016, costs and estimated earnings in excess of billings on uncompleted contracts included unbilled revenues for unapproved change orders of approximately $17.4 million and $21.6 million, respectively, and claims of approximately $0.0 million and $6.0 million, respectively. As of December 31, 2017 and 2016, there were no claims amounts included within accounts receivable. There were contractually billed amounts and retention related to contracts with unapproved change orders and claims of approximately $57.6 million and $80.5 million as of December 31, 2017 and 2016, respectively. For contracts in claim status, contractually billed amounts will generally not be paid by the customer to us until final resolution of related claims. Due to uncertainties inherent in estimates employed in applying percentage-of-completion accounting, estimates may be revised as project work progresses. Application of percentage-of-completion accounting requires that the impact of revised estimates be reported prospectively in the consolidated financial statements. In addition to revenue recognition for long-term construction contracts, we recognize revenues from the performance of services for maintenance, repair and retrofit work consistent with the performance of the services, which are generally on a pro-rata basis over the life of the contractual arrangement. Expenses related to all services arrangements are recognized as incurred. Revenues related to the engineering, manufacturing and repairing of shell and tube heat exchangers are recognized when the product is shipped and all other revenue recognition criteria have been met. Costs related to this work are included in inventory until the product is shipped. Provisions for the entirety of estimated losses on uncompleted contracts are made in the period in which such losses are determined. During 2016, we incurred $19.4 million of losses on a transportation project within our United States electrical construction and facilities services segment as a result of productivity issues attributable to unfavorable job-site conditions. In addition, within the United States mechanical construction and facilities services segment, we incurred $18.3 million of losses on a project at a process facility as a result of a contract dispute with our customer and $9.6 million of losses on an institutional project due to project delays and unfavorable job-site conditions. There were no other significant losses recognized in 2017 and 2016.
Accounts Receivable
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 past due balances. The provision for doubtful accounts during 2017, 2016 and 2015 amounted to approximately $7.3 million, $6.2 million and $2.9 million, respectively. At December 31, 2017 and 2016, our accounts receivable of $1,607.9 million and $1,495.4 million, respectively, included allowances for doubtful accounts of $17.2 million and $12.3 million, respectively. The increase in our allowance for doubtful accounts was primarily due to an increase in the provision for doubtful accounts, partially offset by the write-off of previously reserved accounts receivable. Specific accounts receivable are evaluated when we believe a customer may not be able to meet its financial obligations due to 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.
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 our 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 $0.4 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. 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 $15.7 million of additional expense for the year ended December 31, 2017.
Income Taxes    
We had net deferred income tax liabilities at December 31, 2017 and 2016 of $64.7 million and $117.4 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

37

liabilities are $105.6 million and $139.4 million of deferred income tax assets as of December 31, 2017 and 2016, 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 December 31, 2017 and 2016, the total valuation allowance on deferred income tax assets, related to state net operating loss carryforwards, was approximately $3.8 million and $3.5 million, respectively. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on our taxable income, which has generally exceeded the amount of our net deferred tax asset balance and projections of future taxable income, we have determined that it is more likely than not that the net deferred income tax assets will be realized.
Goodwill and Identifiable Intangible Assets
As of December 31, 2017, we had $964.9 million and $495.0 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, 2016, goodwill and net identifiable intangible assets were $979.6 million and $487.4 million, respectively. As of December 31, 2017, approximately 33.9% of our goodwill related to our United States industrial services segment, approximately 26.6% of our goodwill related to our United States mechanical construction and facilities services segment, approximately 26.5% of our goodwill related to our United States building services segment and approximately 13.0% of our goodwill related to our United States electrical construction and facilities services segment. The changes to goodwill since December 31, 2016 were related to a non-cash impairment charge within our United States industrial services segment, the acquisition of three companies in 2017 and a purchase price adjustment related to the Ardent acquisition. 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 17, “Segment Information”, of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. 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, 2017), the carrying values of our United States building services segment, our United States mechanical construction and facilities services segment and our United States electrical construction and facilities services segment were approximately $471.8 million, $313.9 million and $214.1 million, respectively. The fair values of our United States building services segment, our United States mechanical construction and facilities services segment and our United States electrical construction and facilities services segment exceeded their carrying values by approximately $408.9 million, $1,013.3 million and $673.2 million, respectively.
The fair value of our United States industrial services segment fell short of its carrying value of approximately $666.7 million by approximately $57.5 million, resulting in the recognition of a non-cash impairment charge for the year ended December 31, 2017. Despite a recent increase in crude oil prices, we continue to experience a decrease in demand for new heat exchangers due to a prolonged curtailment in capital spending from customers within this segment. In addition, adverse market conditions throughout this segment, including increased foreign competition within our shop services operations, have resulted in a decrease in our billing rates and related gross profit margins. Finally, economic uncertainty within certain South American markets has caused us to limit our pursuit of opportunities within such countries for our shop services operations. Consequently, we have tempered our expectations regarding the strength of a near-term recovery. For the years ended December 31, 2016 and 2015, no impairment of our goodwill was recognized.
The weighted average cost of capital used in our annual testing for impairment as of October 1, 2017 was 10.6%, 10.0% and 11.0% 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

38

States building services segment and our United States industrial services segment to decrease by approximately $51.1 million, $74.9 million, $53.3 million, and $20.0 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 $25.1 million, $41.0 million, $28.1 million, and $10.0 million, respectively. Although not significant for any of our other domestic segments, such decreases within our United States industrial services segment would have resulted in an increased impairment charge.
We also test for the impairment of trade names that are not subject to amortization by calculating the fair value of such trade names 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. The annual impairment review of our trade names for the years ended December 31, 2017 and 2016 resulted in $0.3 million and $2.4 million, respectively, of non-cash impairment charges as a result of a change in the fair value of subsidiary trade names associated with certain prior acquisitions reported within our United States building services segment and our United States mechanical construction and facilities services segment, respectively. For the year ended December 31, 2015, no impairment of our trade names was recognized.
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. For the years ended December 31, 2017, 2016 and 2015, no impairment of our other identifiable intangible assets was recognized.
As previously referenced, 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 further decline or expected future results be revised downward, the risk of future 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 others. 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 assurances 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 such future impairment charge would result or, if it does, whether such a charge would be material.

39

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not used any derivative financial instruments during the years ended December 31, 2017 and 2016, 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. For further information on borrowing rates and interest rate sensitivity, refer to the Liquidity and Capital Resources discussion in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. As of December 31, 2017, there were borrowings of $25.0 million outstanding under the 2016 Revolving Credit Facility and the balance of the 2016 Term Loan was $284.8 million. Based on the $309.8 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 $2.3 million for 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 $2.3 million for the next twelve months.
We are also exposed to construction market risk and its potential related impact on accounts receivable or costs and estimated earnings in excess of billings 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 ongoing 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 collectibility of these assets. See also the previous discussions of Revenue Recognition from Long-term Construction Contracts and Services Contracts and Accounts Receivable under Application of Critical Accounting Policies in Item 7. 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 year end. The resulting translation adjustments are recorded as accumulated other comprehensive income (loss), 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 the 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 over 10,000 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 or fuel costs could reduce our profitability with respect to projects in progress.

40

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
 
December 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
467,430

 
$
464,617

Accounts receivable, less allowance for doubtful accounts of $17,230 and $12,252, respectively
1,607,922

 
1,495,431

Costs and estimated earnings in excess of billings on uncompleted contracts
122,621

 
130,697

Inventories
42,724

 
37,426

Prepaid expenses and other
43,812

 
40,944

Total current assets
2,284,509

 
2,169,115

Investments, notes and other long-term receivables
2,309

 
8,792

Property, plant and equipment, net
127,156

 
127,951

Goodwill
964,893

 
979,628

Identifiable intangible assets, net
495,036

 
487,398

Other assets
92,001

 
79,554

Total assets
$
3,965,904

 
$
3,852,438

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt and capital lease obligations
$
15,364

 
$
15,030

Accounts payable
567,840

 
501,213

Billings in excess of costs and estimated earnings on uncompleted contracts
524,156

 
489,242

Accrued payroll and benefits
322,865

 
310,514

Other accrued expenses and liabilities
220,727

 
195,775

Total current liabilities
1,650,952

 
1,511,774

Borrowings under revolving credit facility
25,000

 
125,000

Long-term debt and capital lease obligations
269,786

 
283,296

Other long-term obligations
346,049

 
394,426

Total liabilities
2,291,787

 
2,314,496

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, 59,870,980 and 60,606,825 shares issued, respectively
599

 
606

Capital surplus
8,005

 
52,219

Accumulated other comprehensive loss
(94,200
)
 
(101,703
)
Retained earnings
1,796,556

 
1,596,269

Treasury stock, at cost 1,072,552 and 659,841 shares, respectively
(37,693
)
 
(10,302
)
Total EMCOR Group, Inc. stockholders’ equity
1,673,267

 
1,537,089

Noncontrolling interests
850

 
853

Total equity
1,674,117

 
1,537,942

Total liabilities and equity
$
3,965,904

 
$
3,852,438

The accompanying notes to consolidated financial statements are an integral part of these statements.

41

EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31,
(In thousands, except per share data)

 
2017
 
2016
 
2015
Revenues
$
7,686,999

 
$
7,551,524

 
$
6,718,726

Cost of sales
6,539,987

 
6,513,662

 
5,774,247

Gross profit
1,147,012

 
1,037,862

 
944,479

Selling, general and administrative expenses
757,062

 
725,538

 
656,573

Restructuring expenses
1,577

 
1,438

 
824

Impairment loss on goodwill and identifiable intangible assets
57,819

 
2,428

 
—

Operating income
330,554

 
308,458

 
287,082

Interest expense
(12,770
)
 
(12,627
)
 
(8,932
)
Interest income
965

 
663

 
673

Income from continuing operations before income taxes
318,749

 
296,494

 
278,823

Income tax provision
90,699

 
111,199

 
106,256

Income from continuing operations
228,050

 
185,295

 
172,567

Loss from discontinued operation, net of income taxes
(857
)
 
(3,142
)
 
(60
)
Net income including noncontrolling interests
227,193

 
182,153

 
172,507

Less: Net loss (income) attributable to noncontrolling interests
3

 
(218
)
 
(221
)
Net income attributable to EMCOR Group, Inc.
$
227,196

 
$
181,935

 
$
172,286

Basic earnings (loss) per common share:
 
 
 
 
 
From continuing operations attributable to EMCOR Group, Inc. common stockholders
$
3.85

 
$
3.05

 
$
2.74

From discontinued operation
(0.01
)
 
(0.05
)
 
(0.00
)
Net income attributable to EMCOR Group, Inc. common stockholders
$
3.84

 
$
3.00

 
$
2.74

Diluted earnings (loss) per common share:
 
 
 
 
 
From continuing operations attributable to EMCOR Group, Inc. common stockholders
$
3.83

 
$
3.02

 
$
2.72

From discontinued operation
(0.01
)
 
(0.05
)
 
(0.00
)
Net income attributable to EMCOR Group, Inc. common stockholders
$
3.82

 
$
2.97

 
$
2.72

Dividends declared per common share
$
0.32

 
$
0.32

 
$
0.32

The accompanying notes to consolidated financial statements are an integral part of these statements.



42

EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For The Years Ended December 31,
(In thousands)

 
2017
 
2016
 
2015
Net income including noncontrolling interests
$
227,193

 
$
182,153

 
$
172,507

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments
(1,384
)
 
(1,434
)
 
(621
)
Changes in post retirement plans (1)
8,887

 
(23,316
)
 
6,865

Other comprehensive income (loss)
7,503

 
(24,750
)
 
6,244

Comprehensive income
234,696

 
157,403

 
178,751

Less: Comprehensive loss (income) attributable to noncontrolling interests
3

 
(218
)
 
(221
)
Comprehensive income attributable to EMCOR Group, Inc.
$
234,699

 
$
157,185

 
$
178,530

_________________
(1)
Net of tax (provision) benefit of $(1.8) million, $5.1 million and $(1.6) million for the years ended December 31, 2017, 2016 and 2015, respectively.

The accompanying notes to consolidated financial statements are an integral part of these statements.



43

EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31,
(In thousands)
 
2017
 
2016
 
2015
Cash flows - operating activities:
 
 
 
 
 
Net income including noncontrolling interests
$
227,193

 
$
182,153

 
$
172,507

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
39,915

 
38,881

 
36,294

Amortization of identifiable intangible assets
48,594

 
40,908

 
37,895

Provision for doubtful accounts
7,264

 
6,194

 
2,853

Deferred income taxes
(53,358
)
 
(8,108
)
 
(10,300
)
Gain on sale of property, plant and equipment
(1,846
)
 
(330
)
 
(248
)
Excess tax benefits from share-based compensation
(1,616
)
 
(2,546
)
 
(1,663
)
Equity income from unconsolidated entities
(864
)
 
(1,569
)
 
(2,883
)
Non-cash expense for amortization of debt issuance costs
1,186

 
1,354

 
1,307

Non-cash expense (income) from contingent consideration arrangements
317

 
—

 
(464
)
Non-cash expense for impairment of goodwill and identifiable intangible assets
57,819

 
2,428

 
—

Non-cash share-based compensation expense
9,939

 
8,902

 
8,801

Non-cash income from changes in unrecognized tax benefits
(5,641
)
 
(759
)
 
(317
)
Distributions from unconsolidated entities
5,506

 
1,247

 
3,352

Changes in operating assets and liabilities, excluding the effect of businesses acquired:
 
 
 
 
 
Increase in accounts receivable
(80,514
)
 
(98,773
)
 
(115,303
)
(Increase) decrease in inventories
(4,936
)
 
954

 
9,733

Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts
12,433

 
(7,851
)
 
(12,837
)
Increase in accounts payable
54,910

 
13,141

 
25,440

Increase in billings in excess of costs and estimated earnings on uncompleted contracts
24,695

 
57,244

 
58,614

Increase in accrued payroll and benefits and other accrued expenses and liabilities
24,017

 
22,659

 
37,122

Changes in other assets and liabilities, net
1,121

 
8,432

 
16,763

Net cash provided by operating activities
366,134

 
264,561

 
266,666

Cash flows - investing activities:
 
 
 
 
 
Payments for acquisitions of businesses, net of cash acquired
(107,223
)
 
(232,947
)
 
(28,195
)
Proceeds from sale of property, plant and equipment
4,014

 
2,023

 
3,847

Purchase of property, plant and equipment
(34,684
)
 
(39,648
)
 
(35,460
)
Investments in and advances to unconsolidated entities
(675
)
 
(99
)
 
—

Distributions from unconsolidated entities
475

—

—

 
—

Net cash used in investing activities
(138,093
)
 
(270,671
)
 
(59,808
)
Cash flows - financing activities:
 
 
 
 
 
Proceeds from revolving credit facility
—

 
220,000

 
—

Repayments of revolving credit facility
(100,000
)
 
(95,000
)
 
—

Borrowings from long-term debt
—

 
400,000

 
—

Repayments of long-term debt and debt issuance costs
(15,202
)
 
(417,990
)
 
(17,514
)
Repayments of capital lease obligations
(1,445
)
 
(1,384
)
 
(2,737
)
Dividends paid to stockholders
(18,971
)
 
(19,454
)
 
(20,095
)
Repurchase of common stock
(93,166
)
 
(94,221
)
 
(104,330
)
Proceeds from exercise of stock options
—

 
741

 
3,836

Taxes paid related to net share settlements of equity awards
(3,462
)
 
(4,225
)
 
(3,866
)
Issuance of common stock under employee stock purchase plan
4,793

 
4,814

 
4,223

Payments for contingent consideration arrangements
(1,017
)
 
—

 
(403
)
Distributions to noncontrolling interests
—

 
(2,710
)
 
(10,250
)
Excess tax benefits from share-based compensation
—

 
—

 
1,663

Net cash used in financing activities
(228,470
)
 
(9,429
)
 
(149,473
)
Effect of exchange rate changes on cash and cash equivalents
3,242

 
(6,675
)
 
(2,610
)
Increase (decrease) in cash and cash equivalents
2,813

 
(22,214
)
 
54,775

Cash and cash equivalents at beginning of year
464,617

 
486,831

 
432,056

Cash and cash equivalents at end of period
$
467,430

 
$
464,617

 
$
486,831

The accompanying notes to consolidated financial statements are an integral part of these statements.

44

EMCOR Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EQUITY
For The Years Ended December 31,
(In thousands)
 
 
 
EMCOR Group, Inc. Stockholders
 
 
 
Total
 
Common
stock
 
Capital
surplus
 
Accumulated other comprehensive (loss) income (1)
 
Retained
earnings
 
Treasury
stock
 
Noncontrolling
interests
Balance, December 31, 2014
$
1,429,387

 
$
636

 
$
227,885

 
$
(83,197
)
 
$
1,280,991

 
$
(10,302
)
 
$
13,374

Net income including noncontrolling interests
172,507

 
—

 
—

 
—

 
172,286

 
—

 
221

Other comprehensive income
6,244

 
—

 
—

 
6,244

 
—

 
—

 
—

Common stock issued under share-based compensation plans (2)
5,433

 
5

 
5,428

 
—

 
—

 
—

 
—

Tax withholding for common stock issued under share-based compensation plans
(3,866
)
 
—

 
(3,866
)
 
—

 
—

 
—

 
—

Common stock issued under employee stock purchase plan
4,223

 
—

 
4,223

 
—

 
—

 
—

 
—

Common stock dividends
(20,095
)
 
—

 
202

 
—

 
(20,297
)
 
—

 
—

Repurchase of common stock
(112,328
)
 
(24
)
 
(112,304
)
 
—

 
—

 
—

 
—

Distributions to noncontrolling interests
(10,250
)
 
—

 
—

 
—

 
—

 
—

 
(10,250
)
Share-based compensation expense
8,801

 
—

 
8,801

 
—

 
—

 
—

 
—

Balance, December 31, 2015
$
1,480,056

 
$
617

 
$
130,369

 
$
(76,953
)
 
$
1,432,980

 
$
(10,302
)
 
$
3,345

Net income including noncontrolling interests
182,153

 
—

 
—

 
—

 
181,935

 
—

 
218

Other comprehensive loss
(24,750
)
 
—

 
—

 
(24,750
)
 
—

 
—

 
—

Common stock issued under share-based compensation plans (3)
1,724

 
4

 
729

 
—

 
991

 
—

 
—

Tax withholding for common stock issued under share-based compensation plans
(4,225
)
 
—

 
(4,225
)
 
—

 
—

 
—

 
—

Common stock issued under employee stock purchase plan
4,814

 
—

 
4,814

 
—

 
—

 
—

 
—

Common stock dividends
(19,454
)
 
—

 
183

 
—

 
(19,637
)
 
—

 
—

Repurchase of common stock
(88,568
)
 
(15
)
 
(88,553
)
 
—

 
—

 
—

 
—

Distributions to noncontrolling interests
(2,710
)
 
—

 
—

 
—

 
—

 
—

 
(2,710
)
Share-based compensation expense
8,902

 
—

 
8,902

 
—

 
—

 
—

 
—

Balance, December 31, 2016
$
1,537,942

 
$
606

 
$
52,219

 
$
(101,703
)
 
$
1,596,269

 
$
(10,302
)
 
$
853

Net income including noncontrolling interests
227,193

 
—

 
—

 
—

 
227,196

 
—

 
(3
)
Other comprehensive income
7,503

 
—

 
—

 
7,503

 
—

 
—

 
—

Common stock issued under share-based compensation plans
1

 
2

 
(1
)
 
—

 
—

 
—

 
—

Tax withholding for common stock issued under share-based compensation plans
(3,462
)
 
—

 
(3,462
)
 
—

 
—

 
—

 
—

Common stock issued under employee stock purchase plan
4,793

 
1

 
4,792

 
—

 
—

 
—

 
—

Common stock dividends
(18,971
)
 
—

 
164

 
—

 
(19,135
)
 
—

 
—

Repurchase of common stock
(90,821
)
 
(10
)
 
(55,646
)
 
—

 
(7,774
)
 
(27,391
)
 
—

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation expense
9,939

 
—

 
9,939

 
—

 
—

 
—

 
—

Balance, December 31, 2017
$
1,674,117

 
$
599

 
$
8,005

 
$
(94,200
)
 
$
1,796,556

 
$
(37,693
)
 
$
850

_________________
(1)
As of December 31, 2017, represents cumulative foreign currency translation and post retirement liability adjustments of $0.5 million and $(94.7) million, respectively. As of December 31, 2016, represents cumulative foreign currency translation and post retirement liability adjustments of $2.1 million and $(103.8) million, respectively. As of December 31, 2015, represents cumulative foreign currency translation and post retirement liability adjustments of $3.5 million and $(80.5) million, respectively.
(2)
Includes the tax benefit associated with share-based compensation of $1.6 million in 2015.
(3)
Includes a $1.0 million adjustment to retained earnings to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation upon the adoption of Accounting Standards Update No. 2016-09.
The accompanying notes to consolidated financial statements are an integral part of these statements.

45

EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- NATURE OF OPERATIONS
References to the “Company,” “EMCOR,” “we,” “us,” “our” and similar words refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise.
We are one of the largest electrical and mechanical construction and facilities services firms in the United States. In addition, we provide a number of building services and industrial services. We specialize principally in providing construction services relating to electrical and mechanical systems in all types of facilities and in providing various services relating to the operation, maintenance and management of facilities, including refineries and petrochemical plants.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and joint ventures. Significant intercompany accounts and transactions have been eliminated. All investments over which we exercise significant influence, but do not control (a 20% to 50% ownership interest), are accounted for using the equity method of accounting. Additionally, we participate in a joint venture with another company, and we have consolidated this joint venture as we have determined that through our participation we have a variable interest and are the primary beneficiary as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810, “Consolidation”.
For joint ventures that have been accounted for using the consolidation method of accounting, noncontrolling interests represent the allocation of earnings to our joint venture partners who either have a minority-ownership interest in the joint venture or are not at risk for the majority of losses of the joint venture.
The results of operations of companies acquired have been included in the results of operations from the date of the respective acquisition.
Principles of Preparation
The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
Our reportable segments reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services segment due to changes in our internal reporting structure.
During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented as discontinued operations.
Revenue Recognition
Revenues from long-term construction contracts are recognized on the percentage-of-completion method in accordance with ASC Topic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts”. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Certain of our electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Pre-contract costs from our construction projects are generally expensed as incurred. Revenues from the performance of services for maintenance, repair and retrofit work are recognized consistent with the performance of the services, which are generally on a pro-rata basis over the life of the contractual arrangement. Expenses related to all services arrangements are recognized as incurred. Revenues related to the engineering, manufacturing and repairing of shell and tube heat exchangers are recognized when the product is shipped and all other revenue recognition criteria have been met. Costs related to this work are included in inventory until the product is shipped. In the case of customer change orders for uncompleted long-term construction contracts, estimated recoveries are included for work performed in forecasting ultimate profitability on certain contracts. Due to uncertainties inherent in the estimation process, it is possible that completion costs, including those arising from contract penalty provisions and final contract settlements, will be revised in the near-term. Such revisions to costs and income are recognized in the period in which the revisions are determined. Provisions for the entirety of estimated losses on uncompleted contracts are made in the period in which such losses are determined. During

46
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

2016, we incurred $19.4 million of losses on a transportation project within the United States electrical construction and facilities services segment as a result of productivity issues attributable to unfavorable job-site conditions. In addition during 2016, within the United States mechanical construction and facilities services segment, we incurred $18.3 million of losses on a project at a process facility as a result of a contract dispute with our customer and $9.6 million of losses on an institutional project due to project delays and unfavorable job-site conditions. There were no significant losses recognized in 2017.
Costs and estimated earnings on uncompleted contracts
Costs and estimated earnings in excess of billings on uncompleted contracts arise in the consolidated balance sheets when revenues have been recognized but the amounts cannot be billed under the terms of the contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units, or completion of a contract. Also included in costs and estimated earnings on uncompleted contracts 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 in dispute or unapproved as to both scope and/or price or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Such amounts are recorded at estimated net realizable value when realization is probable and can be reasonably estimated. No profit is recognized on construction costs incurred in connection with claim amounts. Claims and unapproved change orders made by us involve negotiation and, in certain cases, litigation. In the event litigation costs are incurred by us in connection with claims or unapproved change orders, such litigation costs are expensed as incurred, although we may seek to recover these costs. We believe that we have established legal bases for pursuing recovery of our recorded unapproved change orders and claims, and it is management’s intention to pursue and litigate such claims, if necessary, until a determination or settlement is reached. Unapproved change orders and claims also involve the use of estimates, and it is reasonably possible that revisions to the estimated recoverable amounts of recorded claims and unapproved change orders may be made in the near term. If we do not successfully resolve these matters, a net expense (recorded as a reduction in revenues) may be required, in addition to amounts that may have been previously provided for. We record the profit associated with the settlement of claims upon receipt of final payment. During 2017, we recognized $18.1 million of gross profit associated with the recovery of certain contract costs previously disputed on a project completed in the prior year. There were no other significant settlements or payments of claims in 2017 and 2016. Claims against us are recognized when a loss is considered probable and amounts are reasonably determinable.
Costs and estimated earnings on uncompleted contracts and related amounts billed as of December 31, 2017 and 2016 were as follows (in thousands):  
 
2017
 
2016
Costs incurred on uncompleted contracts
$
8,258,802

 
$
7,223,436

Estimated earnings, thereon
1,081,509

 
827,799

 
9,340,311

 
8,051,235

Less: billings to date
9,741,846

 
8,409,780

 
$
(401,535
)
 
$
(358,545
)
Such amounts were included in the accompanying Consolidated Balance Sheets at December 31, 2017 and 2016 under the following captions (in thousands):  
 
2017
 
2016
Costs and estimated earnings in excess of billings on uncompleted contracts
$
122,621

 
$
130,697

Billings in excess of costs and estimated earnings on uncompleted contracts
(524,156
)
 
(489,242
)
 
$
(401,535
)
 
$
(358,545
)
As of December 31, 2017 and 2016, costs and estimated earnings in excess of billings on uncompleted contracts included unbilled revenues for unapproved change orders of approximately $17.4 million and $21.6 million, respectively, and claims of approximately $0.0 million and $6.0 million, respectively. As of December 31, 2017 and 2016, there were no claim amounts included within accounts receivable. There were contractually billed amounts and retention related to contracts with unapproved change orders and claims of $57.6 million and $80.5 million as of December 31, 2017 and 2016, respectively. For contracts in claim status, contractually billed amounts will generally not be paid by the customer to us until final resolution of related claims.


47
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

Classification of Contract Amounts
In accordance with industry practice, we classify as current all assets and liabilities relating to the performance of long-term contracts. The term of our contracts ranges from one month to four years and, accordingly, collection or payment of amounts relating to these contracts may extend beyond one year. Accounts receivable at December 31, 2017 and 2016 included $243.5 million and $222.6 million, respectively, of retainage billed under terms of our contracts. We estimate that approximately 85% of this retainage will be collected during 2018. Accounts payable at December 31, 2017 and 2016 included $41.0 million and $40.1 million, respectively, of retainage withheld under terms of the contracts. We estimate that approximately 88% of this retainage will be paid during 2018.
Cash and cash equivalents
For purposes of the consolidated financial statements, we consider all highly liquid instruments with original maturities of three months or less to be cash equivalents. We maintain a centralized cash management system whereby our excess cash balances are invested in high quality, short-term money market instruments, which are considered cash equivalents. We have cash balances in certain of our domestic bank accounts that exceed federally insured limits.
Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts. This allowance is based upon the best estimate of the probable losses in existing accounts receivable. The Company determines the allowances based upon individual accounts when information indicates the customers may have an inability to meet their financial obligations, as well as historical collection and write-off experience. These amounts are re-evaluated and adjusted on a regular basis as additional information is received. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful. At December 31, 2017 and 2016, our accounts receivable of $1,607.9 million and $1,495.4 million, respectively, included allowances for doubtful accounts of $17.2 million and $12.3 million, respectively. The provision for doubtful accounts during 2017, 2016 and 2015 amounted to approximately $7.3 million, $6.2 million and $2.9 million, respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined principally using the average cost method.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation, including amortization of assets under capital leases, is recorded principally using the straight-line method over estimated useful lives of 3 to 10 years for machinery and equipment, 3 to 7 years for vehicles, furniture and fixtures and computer hardware/software, and 25 years for buildings. Leasehold improvements are amortized over the shorter of the remaining life of the lease term or the expected service life of the improvement.
The carrying values of property, plant and equipment are reviewed for impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. In performing this review for recoverability, property, plant and equipment is assessed for possible impairment by comparing their carrying values to their undiscounted net pre-tax cash flows expected to result from the use of the asset. Impaired assets are written down to their fair values, generally determined based on their estimated future discounted cash flows. Based on the results of our testing for the years ended December 31, 2017, 2016 and 2015, no impairment of property, plant and equipment was recognized.
Goodwill and Identifiable Intangible Assets
Goodwill and other identifiable intangible assets with indefinite lives that are not being amortized, such as trade names, are tested at least annually for impairment (which we test each October 1, absent any impairment indicators) and are written down if impaired. Identifiable intangible assets with finite lives are amortized over their useful lives and are reviewed for impairment whenever facts and circumstances indicate that their carrying values may not be fully recoverable. See Note 8 - Goodwill and Identifiable Intangible Assets of the notes to consolidated financial statements for additional information.



48
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

Insurance Liabilities     
Our insurance liabilities are determined actuarially based on claims filed and an estimate of claims incurred but not yet reported. At December 31, 2017 and 2016, the estimated current portion of undiscounted insurance liabilities of $47.3 million and $42.5 million, respectively, were included in “Other accrued expenses and liabilities” in the accompanying Consolidated Balance Sheets. The estimated non-current portion of the undiscounted insurance liabilities included in “Other long-term obligations” at December 31, 2017 and 2016 were $173.2 million and $167.9 million, respectively. The current portion of anticipated insurance recoveries of $14.9 million and $10.8 million at December 31, 2017 and December 31, 2016, respectively, were included in “Prepaid expenses and other” and the non-current portion of anticipated insurance recoveries of $48.6 million and $43.0 million at December 31, 2017 and December 31, 2016, respectively, were included in “Other assets” in the accompanying Consolidated Balance Sheets.
Foreign Operations
The financial statements and transactions of our foreign subsidiaries are maintained in their functional currency and translated into U.S. dollars in accordance with ASC Topic 830, “Foreign Currency Matters”. Translation adjustments have been recorded as “Accumulated other comprehensive loss”, a separate component of “Equity”.
Income Taxes
We account for income taxes in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”). ASC 740 requires an asset and liability approach which requires the recognition of deferred income tax assets and deferred income tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred income tax assets when it is more likely than not that a tax benefit will not be realized.
We account for uncertain tax positions in accordance with the provisions of ASC 740. We recognize accruals of interest related to unrecognized tax benefits as a component of the income tax provision.
Valuation of Share-Based Compensation Plans
We have various types of share-based compensation plans and programs, which are administered by our Board of Directors or its Compensation and Personnel Committee. See Note 13 - Share-Based Compensation Plans of the notes to consolidated financial statements for additional information regarding the share-based compensation plans and programs.
We account for share-based payments in accordance with the provisions of ASC Topic 718, “Compensation-Stock Compensation” (“ASC 718”). ASC 718 requires that all share-based payments issued to acquire goods or services, including grants of employee stock options, be recognized in the statement of operations based on their fair values. Compensation expense related to share-based awards is recognized over the requisite service period, which is generally the vesting period. For shares subject to graded vesting, our policy is to apply the straight-line method in recognizing compensation expense. ASC 718 requires the benefits of tax deductions in excess of recognized compensation expense to be recognized in the Consolidated Statements of Operations when the underlying awards vest or are settled.
New Accounting Pronouncements
On January 1, 2017, we adopted the accounting pronouncement issued by the Financial Accounting Standards Board (“FASB”) to simplify the presentation of deferred income taxes within the balance sheet. This pronouncement eliminates the requirement that deferred tax assets and liabilities are presented as current or noncurrent based on the nature of the underlying assets and liabilities. Instead, the pronouncement requires that all deferred tax assets and liabilities, including valuation allowances, be classified as noncurrent. We adopted this pronouncement on a retrospective basis. As a result of such adoption, approximately $41.7 million of net deferred tax assets, which were previously presented as “Prepaid expenses and other” in the Consolidated Balance Sheet as of December 31, 2016, were reclassified as a reduction to “Other long-term obligations.”
On January 1, 2017, we adopted the accounting pronouncement issued by the FASB to simplify the accounting for goodwill impairment. This guidance eliminates the requirement that an entity calculate the implied fair value of goodwill when measuring an impairment charge. Instead, an entity would record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. We adopted this pronouncement on a prospective basis. Our 2017 annual goodwill impairment test

49
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)

resulted in a $57.5 million non-cash impairment charge within our United States industrial services segment. Such impairment was accounted for under the guidance provided by this new accounting pronouncement.
In February 2016, an accounting pronouncement was issued by the 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 will continue to be recognized in a manner similar to current accounting guidance. This pronouncement is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The adoption is required to be applied on a modified retrospective basis for each prior reporting period presented. Although we have not yet quantified the impact that the adoption of this pronouncement will have on our financial position and/or results of operations, we have begun a process to identify a complete population of our leases. Such process includes reviewing various contracts to identify whether such arrangements convey the right to control the use of an identified asset. We have additionally begun evaluating the impact of the new accounting pronouncement, including enhanced disclosure requirements, on our business processes, controls and systems.
In May 2014, an accounting pronouncement was issued by the FASB to clarify existing guidance on revenue recognition. This guidance includes the required steps to achieve the core principle that a company should recognize 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. This pronouncement is effective for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted. The guidance permits the use of one of two retrospective transition methods. We will adopt the standard on January 1, 2018 using the modified retrospective method. We have substantially completed the process to evaluate the impact of the new pronouncement on our contracts, including identifying differences that will result from applying the requirements of the new guidance. We have also drafted revised accounting policies and have evaluated the enhanced disclosure requirements on our business processes, controls and systems. As a result of these procedures, we do not anticipate that the adoption will have a material impact on our financial position and/or results of operations. With respect to revenues generated from long-term construction, service maintenance, and time and materials contracts, we do not anticipate any significant changes to the pattern of revenue recognition and do not believe that the guidance surrounding identifying contracts and performance obligations or measuring variable consideration will have a material impact on the revenue recognized for these arrangements. Additionally, with respect to our shop services operations within our United States industrial services segment, which currently recognize revenue related to the engineering, manufacturing and repair of shell and tube heat exchangers when the product is shipped and all other revenue recognition criteria have been met, the adoption of the new standard will accelerate the timing of revenue recognition for certain contracts for which control is transferred to our customers over time instead of at a point in time. However, we do not expect such change within our United States industrial services segment to have a material impact on our consolidated financial position and/or results of operations.
NOTE 3 - ACQUISITIONS OF BUSINESSES
On January 4, 2017, March 1, 2017 and November 1, 2017, we acquired three companies for a total consideration of $109.3 million. One company provides fire protection and alarm services primarily in the Southern region of the United States. The second company provides millwright services for manufacturing companies throughout the United States. Both of their results have been included in our United States mechanical construction and facilities services segment. The third company provides mobile mechanical services within the Western region of the United States, and its results have been included in our United States building services segment. In connection with these acquisitions, we acquired working capital of $9.8 million and other net assets of $2.3 million and have preliminarily ascribed $40.6 million to goodwill and $56.6 million to identifiable intangible assets. We expect that all of the acquired goodwill will be deductible for tax purposes.
The purchase price allocations for the businesses acquired in March and November of 2017 are still preliminary and subject to change during their respective measurement periods. The purchase price allocation for the business acquired in January 2017 has been finalized during the fourth quarter of 2017 with an insignificant impact. The acquisition of these businesses was accounted for by the acquisition method, and the prices paid for them have been allocated to their respective assets and liabilities, based upon the estimated fair value of their assets and liabilities at the dates of their respective acquisitions by us.
On April 15, 2016, we completed the acquisition of Ardent Services, L.L.C. and Rabalais Constructors, LLC (collectively, “Ardent”). This acquisition has been included in our United States electrical construction and facilities services segment. Ardent provides electrical and instrumentation services to the energy infrastructure market in North America, and this acquisition further strengthens our position in electrical construction and services and broadens our capabilities across the industrial and energy sectors, especially in the Gulf Coast, Midwest and Western regions of the United States. Under the terms of the transaction, we

50
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - ACQUISITIONS OF BUSINESSES - (Continued)

acquired 100% of Ardent’s equity interests for total consideration of $201.4 million. In connection with the acquisition of Ardent, we acquired working capital of $34.1 million and other net assets of $3.9 million and have ascribed $121.9 million to goodwill and $41.5 million to identifiable intangible assets. We expect that $99.7 million of the acquired goodwill will be deductible for tax purposes. The weighted average amortization period for the identifiable intangible assets is approximately 13.5 years. We completed the final allocation of Ardent’s purchase price during the first quarter of 2017 with an insignificant impact.
On April 1, 2016, we acquired a company for an immaterial amount. This company provides mobile mechanical services within the Southeastern region of the United States, and its results have been included in our United States building services segment. The purchase price for this acquisition was finalized in 2016.
On each of October 19, 2015, October 13, 2015 and June 1, 2015, we acquired a company, each for an immaterial amount. Two of the companies acquired primarily provide mechanical construction services, and their results of operations have been included in our United States mechanical construction and facilities services segment. The results of operations for the other company acquired have been included in our United States building services segment. The purchase prices paid for these acquisitions were finalized in 2016 with an insignificant impact.
NOTE 4 - 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 for the foreseeable future, we ceased construction operations in the United Kingdom during the third quarter 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.
The results of discontinued operations are as follows (in thousands):
 
For the twelve months ended December 31,
 
2017
 
2016
 
2015
Revenues
$
863

 
$
345

 
$
3,823

Loss from discontinued operation, net of income taxes
$
(857
)
 
$
(3,142
)
 
$
(60
)
Diluted loss per share from discontinued operation
$
(0.01
)
 
$
(0.05
)
 
$
(0.00
)
The loss from discontinued operations in 2017 and 2016 was primarily due to legal costs related to the settlement of final contract balances on certain construction projects completed in prior years. The loss from discontinued operations in 2017 was partially offset by revenues recognized upon the settlement of a previously outstanding contract claim.
Included in the Consolidated Balance Sheets at December 31, 2017 and December 31, 2016 are the following major classes of assets and liabilities associated with the discontinued operation (in thousands):
 
December 31,
2017
 
December 31,
2016
Assets of discontinued operation:
 
 
 
Current assets
$
242

 
$
1,233

 
 
 
 
Liabilities of discontinued operation:
 
 
 
Current liabilities
$
2,811

 
$
4,036

At December 31, 2017, the assets and liabilities of the discontinued operation consisted of accounts receivable, contract retentions and contract warranty obligations that are expected to be collected or fulfilled in the ordinary course of business. Additionally at December 31, 2017, there remained less than $0.1 million of obligations related to employee severance, which are expected to be paid in 2018. The settlement of the remaining assets and liabilities may result in additional income and/or expenses. Such income and/or expenses are expected to be immaterial and will be reflected as discontinued operations as incurred.

51
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - EARNINGS PER SHARE
The following tables summarize our calculation of Basic and Diluted Earnings (Loss) per Common Share (“EPS”) for the years ended December 31, 2017, 2016 and 2015 (in thousands, except share and per share data):
 
 
2017
 
2016
 
2015
Numerator:
 
 
 
 
 
Income from continuing operations attributable to EMCOR Group, Inc. common stockholders
$
228,053

 
$
185,077

 
$
172,346

Loss from discontinued operation, net of income taxes
(857
)
 
(3,142
)
 
(60
)
Net income attributable to EMCOR Group, Inc. common stockholders
$
227,196

 
$
181,935

 
$
172,286

Denominator:
 
 
 
 
 
Weighted average shares outstanding used to compute basic earnings (loss) per common share
59,254,256

 
60,769,808

 
62,789,120

Effect of dilutive securities—Share-based awards
364,713

 
436,984

 
518,392

Shares used to compute diluted earnings (loss) per common share
59,618,969

 
61,206,792

 
63,307,512

Basic earnings (loss) per common share:
 
 
 
 
 
From continuing operations attributable to EMCOR Group, Inc. common stockholders
$
3.85

 
$
3.05

 
$
2.74

From discontinued operation
(0.01
)
 
(0.05
)
 
(0.00
)
Net income attributable to EMCOR Group, Inc. common stockholders
$
3.84

 
$
3.00

 
$
2.74

Diluted earnings (loss) per common share:
 
 
 
 
 
From continuing operations attributable to EMCOR Group, Inc. common stockholders
$
3.83

 
$
3.02

 
$
2.72

From discontinued operation
(0.01
)
 
(0.05
)
 
(0.00
)
Net income attributable to EMCOR Group, Inc. common stockholders
$
3.82

 
$
2.97

 
$
2.72

The number of outstanding share-based awards that were excluded from the computation of diluted EPS for the years ended December 31, 2017 and 2016 because they would be anti-dilutive were 2,700 and 3,800, respectively. There were no anti-dilutive share-based awards for the year ended December 31, 2015.
NOTE 6 - INVENTORIES
Inventories as of December 31, 2017 and 2016 consist of the following amounts (in thousands):
 
 
2017
 
2016
Raw materials and construction materials
$
23,924

 
$
21,997

Work in process
18,800

 
15,429

Inventories
$
42,724

 
$
37,426



52
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment in the accompanying Consolidated Balance Sheets consisted of the following amounts as of December 31, 2017 and 2016 (in thousands):
 
2017
 
2016
Machinery and equipment
$
138,592

 
$
133,455

Vehicles
55,648

 
54,165

Furniture and fixtures
20,195

 
21,513

Computer hardware/software
95,716

 
87,416

Land, buildings and leasehold improvements
92,145

 
90,215

Construction in progress
6,779

 
7,544

 
409,075

 
394,308

Accumulated depreciation and amortization
(281,919
)
 
(266,357
)
 
$
127,156

 
$
127,951

Depreciation and amortization expense related to property, plant and equipment, including capital leases, was $39.9 million, $38.9 million and $36.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
NOTE 8 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS    
Goodwill at December 31, 2017 and 2016 was approximately $964.9 million and $979.6 million, respectively, and reflects the excess of cost over fair market value of net identifiable assets of companies acquired. Goodwill attributable to companies acquired in 2017 and 2016 has been valued at $40.6 million and $138.0 million, respectively. ASC Topic 805, “Business Combinations” (“ASC 805”) requires that all business combinations be accounted for using the acquisition method and that certain identifiable intangible assets acquired in a business combination be recognized as assets apart from goodwill. ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”) requires goodwill and other identifiable intangible assets with indefinite useful lives, such as trade names, 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. As of December 31, 2017, approximately 33.9% of our goodwill related to our United States industrial services segment, approximately 26.6% of our goodwill related to our United States mechanical construction and facilities services segment, approximately 26.5% of our goodwill related to our United States building services segment and approximately 13.0% of our goodwill related to our United States electrical construction and facilities services segment.
We test for impairment of our goodwill at the reporting unit level. Our reporting units are consistent with the reportable segments identified in Note 17, “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. Despite a recent increase in crude oil prices, we continue to experience a decrease in demand for new heat exchangers due to a prolonged curtailment in capital spending from customers within our United States industrial services segment. In addition, adverse market conditions throughout this segment, including increased foreign competition within our shop services operations, have resulted in a decrease in our billing rates and related gross profit margins. Finally, economic uncertainty within certain South American markets has caused us to limit our pursuit of opportunities within such countries for our shop services operations. Consequently, we have tempered our expectations regarding the strength of a near-term recovery and recorded a non-cash impairment charge of $57.5 million within this segment as part of our annual goodwill impairment review for the year ended December 31, 2017. For the years ended December 31, 2016 and 2015, no impairment of our goodwill was recognized.
The weighted average cost of capital used in our annual testing for impairment as of October 1, 2017 was 10.6%, 10.0% and 11.0% 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

53
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS - (Continued)

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 $51.1 million, $74.9 million, $53.3 million and $20.0 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 $25.1 million, $41.0 million, $28.1 million and $10.0 million, respectively. Although not significant for any of our other domestic segments, such decreases within our United States industrial services segment would have resulted in an increased impairment charge.
We also test for the impairment of trade names that are not subject to amortization by calculating the fair value of such trade names 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. The annual impairment review of our trade names for the years ended December 31, 2017 and 2016 resulted in $0.3 million and $2.4 million, respectively, of non-cash impairment charges as a result of a change in the fair value of subsidiary trade names associated with certain prior acquisitions reported within our United States building services segment and our United States mechanical construction and facilities services segment, respectively. For the year ended December 31, 2015, no impairment of our trade names was recognized.
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. For the years ended December 31, 2017, 2016 and 2015, no impairment of our other identifiable intangible assets was recognized.
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 others. 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 assurances 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 such future impairment charge would result or, if it does, whether such a charge would be material.
The changes in the carrying amount of goodwill by reportable segments during the years ended December 31, 2017 and 2016 were as follows (in thousands):  
 
United States
electrical
construction
and facilities
services segment
 
United States
mechanical
construction
and facilities
services segment
 
United States
building
services segment
 
United States
industrial services segment
 
Total
Balance at December 31, 2015
$
3,823

 
$
226,071

 
$
228,637

 
$
384,639

 
$
843,170

Acquisitions, sales and purchase price adjustments
119,777

 
525

 
16,156

 
—

 
136,458

Balance at December 31, 2016
123,600

 
226,596

 
244,793

 
384,639

 
979,628

Acquisitions, sales and purchase price adjustments
2,107

 
30,969

 
9,640

 
—

 
42,716

Transfers
—

 
(1,300
)
 
1,300

 
—

 
—

Impairment
—

 
—

 
—

 
(57,451
)
 
(57,451
)
Balance at December 31, 2017
$
125,707

 
$
256,265

 
$
255,733

 
$
327,188

 
$
964,893




54
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS - (Continued)

The aggregate goodwill balance as of December 31, 2015 included $210.6 million of accumulated impairment charges, which were comprised of $139.5 million within the United States building services segment and $71.1 million within the United States industrial services segment.
Identifiable intangible assets as of December 31, 2017 and 2016 consist of the following (in thousands):  
 
December 31, 2017
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Accumulated
Impairment
Charge 
 
Total
Contract backlog
$
55,545

 
$
(55,229
)
 
$
—

 
$
316

Developed technology/Vendor network
95,661

 
(50,479
)
 
—

 
45,182

Customer relationships
500,756

 
(206,319
)
 
(4,834
)
 
289,603

Non-competition agreements
10,220

 
(10,178
)
 
—

 
42

Trade names (amortized)
32,848

 
(19,461
)
 
—

 
13,387

Trade names (unamortized)
198,739

 
—

 
(52,233
)
 
146,506

Total
$
893,769

 
$
(341,666
)
 
$
(57,067
)
 
$
495,036

 
December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Accumulated
Impairment
Charge
 
Total
Contract backlog
$
48,645

 
$
(48,412
)
 
$
—

 
$
233

Developed technology/Vendor network
95,661

 
(45,616
)
 
—

 
50,045

Customer relationships
466,556

 
(173,156
)
 
(4,834
)
 
288,566

Non-competition agreements
10,220

 
(10,041
)
 
—

 
179

Trade names (amortized)
32,848

 
(15,847
)
 
—

 
17,001

Trade names (unamortized)
183,239

 
—

 
(51,865
)
 
131,374

Total
$
837,169

 
$
(293,072
)
 
$
(56,699
)
 
$
487,398


Identifiable intangible assets attributable to companies acquired in 2017 and 2016 have been valued at $56.6 million and $57.9 million, respectively. See Note 3 - Acquisitions of Businesses of the notes to consolidated financial statements for additional information. The identifiable intangible amounts are amortized on a straight-line basis, as it approximates the pattern in which the economic benefits of the identifiable intangible assets are consumed. The weighted average amortization periods for the unamortized balances remaining are, in the aggregate, approximately 9.5 years, which are comprised of the following: 0.25 years for contract backlog, 9.5 years for developed technology/vendor network, 9.5 years for customer relationships, 0.5 years for non-competition agreements and 11 years for trade names.
Amortization expense related to identifiable intangible assets with finite lives was $48.6 million, $40.9 million and $37.9 million for the years ended December 31, 2017, 2016 and 2015, respectively. The following table presents the estimated future amortization expense of identifiable intangible assets in the following years (in thousands):  
2018
$
40,579

2019
38,281

2020
38,100

2021
37,306

2022
35,103

Thereafter
159,161

 
$
348,530


55
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - DEBT
Credit Agreement
Until August 3, 2016, we had a credit agreement dated as of November 25, 2013 (as amended, the “2013 Credit Agreement”), which provided for a revolving credit facility of $750.0 million (the “2013 Revolving Credit Facility”) and a term loan of $350.0 million (the “2013 Term Loan”). On August 3, 2016, we amended and restated the 2013 Credit Agreement to provide 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. The proceeds of the 2016 Term Loan were used to repay amounts drawn under the 2013 Term Loan, as well as a portion of the outstanding balance under the 2013 Revolving Credit Facility. 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 December 31, 2017 and December 31, 2016. 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 December 31, 2017. 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 (1.57% and 1.69% at December 31, 2017 for our 2016 Revolving Credit Facility and our 2016 Term Loan, respectively) 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 (4.50% at December 31, 2017), (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 rates in effect at December 31, 2017 were 2.57% and 2.69% for our 2016 Revolving Credit Facility and our 2016 Term Loan, respectively. 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. During 2016, we capitalized an additional $3.0 million of debt issuance costs associated with the 2016 Credit Agreement. 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 ending 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 December 31, 2017 and December 31, 2016, the balance of the 2016 Term Loan was $284.8 million and $300.0 million, respectively. As of December 31, 2017 and December 31, 2016, we had approximately $110.1 million and $91.9 million of letters of credit outstanding, respectively. There were $25.0 million and $125.0 million in borrowings outstanding under the 2016 Revolving Credit Facility as of December 31, 2017 and December 31, 2016, respectively.











56
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - DEBT - (Continued)
Long-term debt in the accompanying Consolidated Balance Sheets consisted of the following amounts as of December 31, 2017 and 2016 (in thousands): 
 
2017
 
2016
Revolving credit facility
$
25,000

 
$
125,000

Term loan, interest payable at varying amounts through 2021
284,810

 
300,000

Unamortized debt issuance costs
(4,251
)
 
(5,437
)
Capitalized lease obligations, at weighted average interest rates from 2.5% to 5.0% payable in varying amounts through 2023
4,571

 
3,732

Other, payable through 2019
20

 
31

Total debt
310,150

 
423,326

Less: current maturities
15,364

 
15,030

Total long-term debt
$
294,786

 
$
408,296

Capitalized Lease Obligations
See Note 15 - Commitments and Contingencies of the notes to consolidated financial statements for additional information.
NOTE 10 - 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 December 31, 2017 and December 31, 2016 (in thousands):
 
 
Assets at Fair Value as of December 31, 2017
Asset Category
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents (1)
$
467,430

 
$
—

 
$
—

 
$
467,430

Restricted cash (2)
1,958

 
—

 
—

 
1,958

Deferred compensation plan assets (3)
22,054

 
—

 
—

 
22,054

Total
$
491,442

 
$
—

 
$
—

 
$
491,442

 
 
Assets at Fair Value as of December 31, 2016
Asset Category
Level 1
 
Level 2
 
Level 3
 
Total
Cash and cash equivalents (1)
$
464,617

 
$
—

 
$
—

 
$
464,617

Restricted cash (2)
2,043

 
—

 
—

 
2,043

Deferred compensation plan assets (3)
12,153

 
—

 
—

 
12,153

Total
$
478,813

 
$
—

 
$
—

 
$
478,813

_________________
(1)
Cash and cash equivalents consist primarily of money market funds with original maturity dates of three months or less, which are Level 1 assets. At December 31, 2017 and 2016, we had $194.2 million and $154.6 million, respectively, in money market funds.
(2)
Restricted cash is classified as “Prepaid expenses and other” in the Consolidated Balance Sheets.
(3)
Deferred compensation plan assets are classified as “Other assets” in the Consolidated Balance Sheets.

57
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - FAIR VALUE MEASUREMENTS - (Continued)

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 11 - INCOME TAXES    
On December 22, 2017, the U.S. government enacted comprehensive tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, among other things, reducing the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018.
As a result of the reduction of the U.S. corporate tax rate to 21%, U.S. generally accepted accounting principles require companies to re-value their deferred tax assets and liabilities as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. Based on currently available information, the Company’s estimated value of its net deferred federal and state tax liability balances have been reduced by approximately $39.3 million, which has been recorded as a reduction of income tax expense in the Company’s Consolidated Statements of Operations for the year ended December 31, 2017. Such estimate will be finalized upon the completion of the 2017 federal and state income tax returns. In addition, under the Tax Act, companies are required to evaluate the effect of a one-time transition tax to their specified foreign operations. Although such estimate is still provisional, the Company believes the impact of such transition tax is expected to be immaterial. The Company will continue to evaluate the interpretations and assumptions made, guidance that may be issued and actions the Company may take as a result of the Tax Act, which could materially change this estimate in 2018 as new information becomes available.
Our 2017 income tax provision from continuing operations was $90.7 million compared to $111.2 million for 2016 and $106.3 million for 2015. The actual income tax rates on income from continuing operations before income taxes, less amounts attributable to noncontrolling interests, for the years ended December 31, 2017, 2016 and 2015, were 28.5%, 37.5% and 38.1%, respectively. The decrease in the 2017 income tax provision compared to 2016 was predominantly due to the revaluation of the Company’s net deferred tax liability balances as discussed above, partially offset by increased income before income taxes. The increase in the 2016 income tax provision compared to 2015 was predominantly due to the effect of increased income before income taxes and certain increases in the state tax provision attributable to the mix of earnings.
As of December 31, 2017, the amount of unrecognized income tax benefits was $0.8 million. As of December 31, 2016, the amount of unrecognized income tax benefits was $4.0 million, of which $2.2 million, if recognized, would favorably affect our effective income tax rate.
We report interest expense and/or interest income related to unrecognized tax benefits in the income tax provision. As of December 31, 2017 and 2016, we had approximately $0.1 million and $0.5 million, respectively, of accrued interest expense related to unrecognized income tax benefits included as a liability in the Consolidated Balance Sheets. Total income tax reserves included in “Other long-term liabilities” were $0.9 million and $4.5 million as of December 31, 2017 and 2016, respectively. For the years ended December 31, 2017 and 2016, less than $0.1 million and approximately $0.1 million of interest expense, respectively, was recognized in the income tax provision. In addition, for the years ended December 31, 2017 and 2016, approximately $0.5 million and less than $0.1 million of interest income, respectively, was recognized in the income tax provision.









58
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - INCOME TAXES - (Continued)

A reconciliation of unrecognized income tax benefits at the beginning and at the end of the year is as follows (in thousands):  
 
2017
 
2016
Balance at beginning of year
$
3,982

 
$
4,761

Additions based on tax positions related to the current year
1,158

 
1,415

Additions based on tax positions related to prior years
1,244

 
—

Reductions for tax positions of prior years
(5,543
)
 
(1,360
)
Reductions for expired statute of limitations
—

 
(834
)
Balance at end of year
$
841

 
$
3,982

We do not anticipate any significant changes to our reserves for uncertain tax positions in the next twelve months.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 2012 through 2015. During the first quarter of 2017, the Company settled an examination with a taxing authority which resulted in a $3.3 million reversal of reserves for previously uncertain tax positions.
The income tax provision in the accompanying Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 consisted of the following (in thousands):
 
2017
 
2016
 
2015
Current:
 
 
 
 
 
Federal provision
$
120,317

 
$
95,171

 
$
94,405

State and local provisions
23,496

 
23,387

 
21,320

Foreign provision
244

 
749

 
831

 
144,057

 
119,307

 
116,556

Deferred
(53,358
)
 
(8,108
)
 
(10,300
)
 
$
90,699

 
$
111,199

 
$
106,256

Factors accounting for the variation from U.S. statutory income tax rates from continuing operations for the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands):
 
2017
 
2016
 
2015
Federal income taxes at the statutory rate
$
111,562

 
$
103,773

 
$
97,588

State and local income taxes, net of federal tax benefits
15,736

 
14,801

 
12,590

State tax reserves
(2,543
)
 
74

 
62

Permanent differences
4,916

 
3,698

 
3,096

Domestic manufacturing deduction
(10,387
)
 
(6,830
)
 
(6,604
)
Excess tax benefit from share-based compensation
(1,341
)
 
(2,114
)
 
—

Goodwill impairment
17,055

 
—

 
—

Foreign income taxes (including UK statutory rate changes)
(2,586
)
 
(1,290
)
 
(361
)
Impact of federal rate change on net deferred tax liabilities
(39,343
)
 
—

 
—

Federal tax reserves
(1,247
)
 
(893
)
 
14

Other
(1,123
)
 
(20
)
 
(129
)
 
$
90,699

 
$
111,199

 
$
106,256







59
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - INCOME TAXES - (Continued)

The deferred income tax assets and deferred income tax liabilities recorded for the years ended December 31, 2017 and 2016 were as follows (in thousands):
 
2017
 
2016
Deferred income tax assets:
 
 
 
Excess of amounts expensed for financial statement purposes over amounts deducted for income tax purposes:
 
 
 
Insurance liabilities
$
42,425

 
$
62,473

Pension liability
6,900

 
8,950

Deferred compensation
27,742

 
35,649

Other (including liabilities and reserves)
28,534

 
32,350

Total deferred income tax assets
105,601

 
139,422

Valuation allowance for deferred tax assets
(3,825
)
 
(3,531
)
Net deferred income tax assets
101,776

 
135,891

Deferred income tax liabilities:
 
 
 
Costs capitalized for financial statement purposes and deducted for income tax purposes:
 
 
 
Goodwill and identifiable intangible assets
(150,900
)
 
(229,347
)
Depreciation of property, plant and equipment
(11,781
)
 
(18,145
)
Other
(3,792
)
 
(5,761
)
Total deferred income tax liabilities
(166,473
)
 
(253,253
)
Net deferred income tax liabilities
$
(64,697
)
 
$
(117,362
)
The components of the net deferred income tax liabilities in the accompanying Consolidated Balance Sheets are included in “Other assets” of $10.0 million and $12.9 million and “Other long-term obligations” of $74.7 million and $130.3 million, at December 31, 2017 and December 31, 2016, respectively.
We file a consolidated federal income tax return including all of our U.S. subsidiaries. As of December 31, 2017 and 2016, the total valuation allowance on deferred income tax assets was approximately $3.8 million and $3.5 million, respectively, related to state and local net operating losses. Although realization is not assured, we believe it is more likely than not that the deferred income tax assets, net of the valuation allowance discussed above, will be realized. The amount of the deferred income tax assets considered realizable, however, could be reduced if estimates of future income are reduced.
At December 31, 2017, we had trading losses for United Kingdom income tax purposes of approximately $12.3 million, which have no expiration date. Such losses are subject to review by the United Kingdom taxing authority. Realization of the deferred income tax assets is dependent on our generating sufficient taxable income. We believe that the deferred income tax assets will be realized through projected future income.
Income from continuing operations before income taxes for the years ended December 31, 2017, 2016 and 2015 consisted of the following (in thousands):
 
 
2017
 
2016
 
2015
United States
$
303,854

 
$
283,904

 
$
264,867

Foreign
14,895

 
12,590

 
13,956

 
$
318,749

 
$
296,494

 
$
278,823





60
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - INCOME TAXES - (Continued)

The unremitted earnings of our United Kingdom subsidiary will not be subject to the transition tax previously referenced because a portion of such earnings has been previously taxed and there remains an accumulated deficit position in earnings and profits. The unremitted earnings of our Puerto Rico subsidiary may be subject to the transition tax; however, as part of our evaluation of the Tax Act, we estimate such tax will be immaterial.
As of December 31, 2017, the amount of cash held by our United Kingdom and Puerto Rico subsidiaries was approximately $43.3 million and approximately $3.0 million, respectively. The future repatriation of cash, or unremitted earnings, of these subsidiaries may result in an immaterial amount of federal and state income taxes or foreign withholding taxes.
NOTE 12 - COMMON STOCK
As of December 31, 2017 and December 31, 2016, there were 58,798,428 and 59,946,984 shares of our common stock outstanding, respectively.
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 authorized us to repurchase up to $100.0 million of our outstanding common stock. On December 5, 2013, October 23, 2014, October 28, 2015 and October 25, 2017, our Board of Directors authorized us to repurchase up to an additional $100.0 million, $250.0 million, $200.0 million and $100.0 million of our outstanding common stock, respectively. During 2017, we have repurchased approximately 1.4 million shares of our common stock for approximately $90.8 million. Since the inception of the repurchase programs through December 31, 2017, we have repurchased approximately 12.8 million shares of our common stock for approximately $575.2 million. As of December 31, 2017, there remained authorization for us to repurchase approximately $174.8 million of our shares. The repurchase programs have no expiration date and do 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 programs have been and will be funded from our operations.
NOTE 13 - SHARE-BASED COMPENSATION PLANS
We have an incentive plan under which stock options, stock awards, stock units and other share-based compensation may be granted to officers, non-employee directors and key employees of the Company. Under the terms of this plan, 3,250,000 shares were authorized, and 1,461,316 shares are available for grant or issuance as of December 31, 2017. Any issuances under this plan are valued at the fair market value of the common stock on the grant date. The vesting and expiration of any stock option grants and the vesting schedule of any stock awards or stock units are determined by the Compensation and Personnel Committee of our Board of Directors at the time of the grant. Forfeitures are recognized as they occur.













61
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - SHARE-BASED COMPENSATION PLANS - (Continued)

The following table summarizes activity regarding our stock options and awards of shares and stock units since December 31, 2014:
Stock Options
 
Restricted Stock Units
 
 
Shares
 
Weighted
Average
Price
 
 
 
Shares
 
Weighted
Average
Price
Balance, December 31, 2014
 
566,774

 
$
24.15

 
Balance, December 31, 2014
 
634,298

 
$
34.16

Granted
 
—

 
—

 
Granted
 
241,274

 
$
45.23

Expired
 
(30,000
)
 
$
12.09

 
Forfeited
 
(3,587
)
 
$
29.56

Exercised
 
(230,048
)
 
$
26.71

 
Vested
 
(266,497
)
 
$
32.17

Balance, December 31, 2015
 
306,726

 
$
23.42

 
Balance, December 31, 2015
 
605,488

 
$
39.47

Granted
 
—

 
—

 
Granted
 
191,936

 
$
46.86

Expired
 
—

 
—

 
Forfeited
 
(965
)
 
$
43.13

Exercised
 
(163,726
)
 
$
23.73

 
Vested
 
(304,171
)
 
$
35.29

Balance, December 31, 2016
 
143,000

 
$
23.06

 
Balance, December 31, 2016
 
492,288

 
$
44.93

Granted
 
—

 
—

 
Granted
 
198,179

 
$
68.33

Expired
 
—

 
—

 
Forfeited
 
(1,200
)
 
$
60.68

Exercised
 
(50,000
)
 
$
20.42

 
Vested
 
(180,395
)
 
$
44.57

Balance, December 31, 2017
 
93,000

 
$
24.48

 
Balance, December 31, 2017
 
508,872

 
$
54.13

We recognized $9.9 million, $8.9 million and $8.8 million of compensation expense for stock units awarded to non-employee directors and employees pursuant to incentive plans for the years ended December 31, 2017, 2016 and 2015, respectively. We have $9.3 million of compensation expense, net of income taxes, which will be recognized over the remaining vesting periods of up to approximately five years. In addition, an aggregate of 97,200 restricted stock units granted to employees and non-employee directors vested as of December 31, 2017, but issuance has been deferred up to five years or upon retirement.
All outstanding stock options were fully vested; therefore, no compensation expense was recognized for the years ended December 31, 2017, 2016 and 2015.
As a result of stock option exercises, less than $0.1 million, $0.7 million and $3.8 million of proceeds were received during the years ended December 31, 2017, 2016 and 2015, respectively. The income tax benefit derived in 2017, 2016 and 2015 as a result of such exercises and share-based compensation was $3.9 million, $6.2 million and $1.6 million, respectively, of which $1.6 million, $2.5 million and $1.7 million, respectively, represented excess tax benefits. The total intrinsic value of options (the amounts by which the stock price exceeded the exercise price of the option on the date of exercise) that were exercised during 2017, 2016 and 2015 was $2.3 million, $4.6 million and $4.6 million, respectively.
At December 31, 2017, 2016 and 2015, 93,000 options, 143,000 options and 306,726 options were exercisable, respectively. The weighted average exercise price of exercisable options at December 31, 2017, 2016 and 2015 was approximately $24.48, $23.06 and $23.42, respectively. The total aggregate intrinsic value of options outstanding and exercisable as of December 31, 2017, 2016 and 2015 were approximately $5.3 million, $6.8 million and $7.6 million, respectively.
The following table summarizes information about our outstanding stock options as of December 31, 2017:  
Stock Options Outstanding and Exercisable
Range of
Exercise Prices
 
Number
 
Weighted Average
Remaining Life
 
Weighted Average
Exercise Price
 $24.48
 
93,000
 
2.45 Years
 
$24.48
We have an employee stock purchase plan. Under the terms of this plan, the maximum number of shares of our common stock that may be purchased is 3,000,000 shares. Generally, our corporate employees and non-union employees of our United States

62
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - SHARE-BASED COMPENSATION PLANS - (Continued)

subsidiaries are eligible to participate in this plan. Employees covered by collective bargaining agreements generally are not eligible to participate in this plan.
NOTE 14 - RETIREMENT PLANS
Defined Benefit 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 plan. On May 31, 2010, we curtailed the future accrual of benefits for active employees under this plan.
We account for our UK Plan and other defined benefit plans in accordance with ASC 715, “Compensation-Retirement Benefits” (“ASC 715”). ASC 715 requires that (a) the funded status, which is measured as the difference between the fair value of plan assets and the projected benefit obligations, be recorded in our balance sheet with a corresponding adjustment to accumulated other comprehensive income (loss) and (b) gains and losses for the differences between actuarial assumptions and actual results, and unrecognized service costs, be recognized through accumulated other comprehensive income (loss). These amounts will be subsequently recognized as net periodic pension cost.
The change in benefit obligations and assets of the UK Plan for the years ended December 31, 2017 and 2016 consisted of the following components (in thousands):
 
 
2017
 
2016
Change in pension benefit obligation
 
 
 
Benefit obligation at beginning of year
$
306,731

 
$
295,825

Interest cost
8,622

 
10,320

Actuarial loss
2,058

 
67,329

Benefits paid
(13,709
)
 
(12,044
)
Foreign currency exchange rate changes
28,916

 
(54,699
)
Benefit obligation at end of year
332,618

 
306,731

Change in pension plan assets
 

 
 

Fair value of plan assets at beginning of year
257,236

 
263,555

Actual return on plan assets
22,899

 
47,728

Employer contributions
4,727

 
4,906

Benefits paid
(13,709
)
 
(12,044
)
Foreign currency exchange rate changes
24,815

 
(46,909
)
Fair value of plan assets at end of year
295,968

 
257,236

Funded status at end of year
$
(36,650
)
 
$
(49,495
)
Amounts not yet reflected in net periodic pension cost and included in accumulated other comprehensive loss (in thousands):
 
2017
 
2016
Unrecognized losses
$
102,054

 
$
102,943

The underfunded status of the UK Plan of $36.7 million and $49.5 million at December 31, 2017 and 2016, respectively, is included in “Other long-term obligations” in the accompanying Consolidated Balance Sheets. No plan assets are expected to be returned to us during the year ending December 31, 2018.
The weighted average assumptions used to determine benefit obligations as of December 31, 2017 and 2016 were as follows:
 
2017
 
2016
Discount rate
2.5
%
 
2.7
%

63
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - RETIREMENT PLANS - (Continued)


The weighted average assumptions used to determine net periodic pension cost for the years ended December 31, 2017, 2016 and 2015 were as follows:
 
2017
 
2016
 
2015
Discount rate
2.7
%
 
3.8
%
 
3.6
%
Annual rate of return on plan assets
5.3
%
 
6.2
%
 
6.3
%
The annual rate of return on plan assets has been determined by modeling possible returns using the actuary’s portfolio return calculator and the fair value of plan assets. This models the long term expected returns of the various asset classes held in the portfolio and takes into account the additional benefits of holding a diversified portfolio. For measurement purposes of the liability, the annual rates of inflation of covered pension benefits assumed for 2017 and 2016 were 2.1% and 2.2%, respectively.
The components of net periodic pension cost of the UK Plan for the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands):
 
 
2017
 
2016
 
2015
Interest cost
$
8,622

 
$
10,320

 
$
11,603

Expected return on plan assets
(13,508
)
 
(14,227
)
 
(16,181
)
Amortization of unrecognized loss
2,942

 
2,047

 
2,526

Net periodic pension cost (income)
$
(1,944
)
 
$
(1,860
)
 
$
(2,052
)
Actuarial gains and losses are amortized using a corridor approach whereby cumulative gains and losses in excess of the greater of 10% of the pension benefit obligation or the fair value of plan assets are amortized over the average life expectancy of plan participants. The amortization period for 2017 was 26 years.
The reclassification adjustment, net of income taxes, for the UK Plan from accumulated other comprehensive loss into net periodic pension cost for the years ended December 31, 2017, 2016 and 2015 was approximately $2.3 million, $1.7 million and $2.0 million, respectively, which was classified as a component of “Cost of sales” and “Selling, general and administrative expenses” in the Consolidated Statements of Operations. The estimated unrecognized loss for the UK Plan that will be amortized from accumulated other comprehensive loss into net periodic pension cost over the next year is approximately $2.1 million, net of income taxes.
UK Plan Assets
The weighted average asset allocations and weighted average target allocations at December 31, 2017 and 2016 were as follows:
 
Asset Category
Target
Asset
Allocation 
 
December 31,
2017
 
December 31,
2016
Equity securities
15.0
%
 
14.1
%
 
44.9
%
Debt securities
65.0
%
 
77.3
%
 
55.0
%
Cash
10.0
%
 
8.6
%
 
0.1
%
Property
10.0
%
 
—
%
 
—
%
Total
100.0
%
 
100.0
%
 
100.0
%
Plan assets of our UK Plan are invested through fund managers. Debt securities include United Kingdom government debt and United States, United Kingdom, European and emerging market corporate debt. Equity securities include marketable equity and equity like instruments across developed global equity markets. During 2017, the UK Plan’s trustees revised the investment strategy of this plan, resulting in a change in the target asset allocation compared to the prior year.


64
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - RETIREMENT PLANS - (Continued)


The following tables set forth by level, within the fair value hierarchy discussed in Note 10 - Fair Value Measurements, the fair value of assets of the UK Plan as of December 31, 2017 and 2016 (in thousands):
 
Assets at Fair Value as of December 31, 2017
Asset Category
    Level 1
 
Level 2
 
Level 3
 
Total
Equity and equity like investments
$
—

 
$
41,684

 
$
—

 
$
41,684

Corporate debt securities
—

 
69,630

 
103,945

 
173,575

Government bonds
—

 
55,207

 
—

 
55,207

Cash
25,502

 
—

 
—

 
25,502

Total
$
25,502

 
$
166,521

 
$
103,945

 
$
295,968

 
Assets at Fair Value as of December 31, 2016
Asset Category
    Level 1
 
Level 2
 
Level 3
 
Total
Equity and equity like investments
$
—

 
$
115,416

 
$
—

 
$
115,416

Corporate debt securities
—

 
103,912

 
—

 
103,912

Government bonds
—

 
37,473

 
—

 
37,473

Cash
435

 
—

 
—

 
435

Total
$
435

 
$
256,801

 
$
—

 
$
257,236

In regards to the plan assets of our UK Plan, investment amounts have been allocated within the fair value hierarchy based on the nature of the investment. The characteristics of the assets that sit within each level are summarized as follows:
Level 1-This asset represents cash.
Level 2-These assets are a combination of the following:
(a)
Assets that are not exchange traded but have a unit price that is based on the net asset value of the fund. The unit prices are not quoted but the underlying assets held by the fund are either:
(i)
held in a variety of listed investments; or
(ii)
held in UK treasury bonds or corporate bonds with the asset value being based on fixed income streams. Some of the underlying bonds are also listed on regulated markets.
It is the value of the underlying assets that have been used to calculate the unit price of the fund.
(b)
Assets that are not exchange traded but have a unit price that is based on the net asset value of the fund. The unit prices are quoted. The underlying assets within these funds comprise cash or assets that are listed on a regulated market (i.e., the values are based on observable market data) and it is these values that are used to calculate the unit price of the fund.
Level 3-Assets that are not exchange traded but have a unit price that is based on the net asset value of the fund. The unit prices are not quoted and are not available on any market.
The table below sets forth a summary of changes in the fair value of the UK Plan’s Level 3 assets for the year ended December 31, 2017 (in thousands):
Corporate Debt Securities
2017
Start of year balance
$
—

Actual return on plan assets, relating to assets still held at reporting date
1,858

Purchases, sales and settlements, net
98,633

Change due to exchange rate changes
3,454

End of year balance
$
103,945

Level 3 debt securities are valued based on the credit rating and performance of the underlying debt portfolio, which includes benchmarking of risk and return relative to the investment plan.

65
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - RETIREMENT PLANS - (Continued)


The investment policies and strategies for the plan assets are established by the plan trustees (who are independent of the Company) to achieve a reasonable balance between risk, likely return and administration expense, as well as to maintain funds at a level to meet minimum funding requirements. In order to ensure that an appropriate investment strategy is in place, an analysis of the UK Plan’s assets and liabilities is completed periodically.
Cash Flows:
Contributions
Our United Kingdom subsidiary expects to contribute approximately $4.8 million to its UK Plan in 2018.
Estimated Future Benefit Payments
The following estimated benefit payments are expected to be paid in the following years (in thousands):
 
Pension
Benefits
2018
$
14,599

2019
$
15,031

2020
$
15,474

2021
$
15,930

2022
$
16,401

Succeeding five years
$
89,566

The following table shows certain information for the UK Plan where the accumulated benefit obligation is in excess of plan assets as of December 31, 2017 and 2016 (in thousands):
 
2017
 
2016
Projected benefit obligation
$
332,618

 
$
306,731

Accumulated benefit obligation
$
332,618

 
$
306,731

Fair value of plan assets
$
295,968

 
$
257,236

We also sponsor two U.S. defined benefit plans in which participation by new individuals is frozen. The benefit obligation associated with these plans as of December 31, 2017 and 2016 was approximately $7.2 million and $7.0 million, respectively. The estimated fair value of the plan assets as of December 31, 2017 and 2016 was approximately $5.5 million and $5.0 million, respectively. The plan assets are considered Level 1 assets within the fair value hierarchy and are predominantly invested in cash, equities, and equity and bond funds. The pension liability balances as of December 31, 2017 and 2016 are classified as “Other long-term obligations” in the accompanying Consolidated Balance Sheets. The measurement date for these two plans is December 31 of each year. The major assumptions used in the actuarial valuations to determine benefit obligations as of December 31, 2017 and 2016 included discount rates of 3.50% for 2017 and 3.80% and 4.00% for 2016. Also, included was an expected rate of return of 7.00% for both 2017 and 2016. The reclassification adjustment, net of income taxes, from accumulated other comprehensive loss into net periodic pension cost was approximately $0.2 million for each of the years ended December 31, 2017, 2016 and 2015, which was classified as a component of “Selling, general and administrative expenses” in the Consolidated Statements of Operations. The estimated loss for these plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost over the next year is approximately $0.2 million, net of income taxes. The future estimated benefit payments expected to be paid from the plans for the next ten years is approximately $0.4 million per year.
Multiemployer Plans
We participate in approximately 200 multiemployer pension plans (“MEPPs”) that provide retirement benefits to certain union employees in accordance with various collective bargaining agreements (“CBAs”). As one of many participating employers in an MEPP, we are potentially liable with the other participating employers for such plan's underfunding either through an increase in our required contributions, or in the case of our withdrawal from the plan, a payment based upon our proportionate share of the plan's unfunded benefits, in each case, as described below. Our contributions to a particular MEPP are established by the applicable CBAs; however, our required contributions may increase based on the funded status of an MEPP and legal requirements of the

66
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - RETIREMENT PLANS - (Continued)


Pension Protection Act of 2006 (the “PPA”), which requires substantially underfunded MEPPs to implement a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) to improve their funded status. Factors that could impact the funded status of an MEPP include, without limitation, investment performance, changes in the participant demographics, decline in the number of contributing employers, changes in actuarial assumptions and the utilization of extended amortization provisions.
An FIP or RP requires a particular MEPP to adopt measures to correct its underfunding status. These measures may include, but are not limited to: (a) an increase in our contribution rate as a signatory to the applicable CBA, (b) a reallocation of the contributions already being made by participating employers for various benefits to individuals participating in the MEPP and/or (c) a reduction in the benefits to be paid to future and/or current retirees. In addition, the PPA requires that a 5% surcharge be levied on employer contributions for the first year commencing after the date the employer receives notice that the MEPP is in critical status and a 10% surcharge on each succeeding year until a CBA is in place with terms and conditions consistent with the RP.
We could also be obligated to make payments to MEPPs if we either cease to have an obligation to contribute to the MEPP or significantly reduce our contributions to the MEPP because we reduce our number of employees who are covered by the relevant MEPP for various reasons, including, but not limited to, layoffs or closure of a subsidiary assuming the MEPP has unfunded vested benefits. The amount of such payments (known as a complete or partial withdrawal liability) would equal our proportionate share of the MEPPs’ unfunded vested benefits. We believe that certain of the MEPPs in which we participate may have unfunded vested benefits. Due to uncertainty regarding future factors that could trigger withdrawal liability, as well as the absence of specific information regarding the MEPP’s current financial situation, we are unable to determine (a) the amount and timing of any future withdrawal liability, if any, and (b) whether our participation in these MEPPs could have a material adverse impact on our financial position, results of operations or liquidity. We did not record any withdrawal liability for the years ended December 31, 2017, 2016 and 2015.
The following table lists all domestic MEPPs to which our contributions exceeded $2.0 million in 2017. Additionally, this table also lists all domestic MEPPs to which we contributed in 2017 in excess of $0.5 million for MEPPs in the critical status, “red zone”, and $1.0 million in the endangered status, “orange or yellow zones”, as defined by the PPA (in thousands):     
Pension Fund
 
EIN/Pension Plan
Number
 
PPA Zone Status (1)
 
FIP/RP
Status
 
Contributions 
 
Contributions greater than 5% of total plan contributions (2)
 
Expiration
date of CBA
 
2017
 
2016
 
 
2017
 
2016
 
2015
 
National Automatic Sprinkler Industry Pension Fund
 
52-6054620 001
 
Red
 
Red
 
Implemented
 
$
14,228

 
$
11,075

 
$
6,697

 
No
 
May 2018 to
March 2021
Sheet Metal Workers National Pension Fund
 
52-6112463 001
 
Yellow
 
Yellow
 
Implemented
 
12,895

 
11,280

 
10,891

 
No
 
May 2018 to
July 2020
Plumbers & Pipefitters National Pension Fund
 
52-6152779 001
 
Yellow
 
Yellow
 
Implemented
 
12,550

 
12,034

 
12,021

 
No
 
April 2018 to
May 2023
National Electrical Benefit Fund
 
53-0181657 001
 
Green
 
Green
 
N/A
 
11,572

 
10,328

 
8,513

 
No
 
February 2018 to
May 2022
Pension, Hospitalization & Benefit Plan of the Electrical Industry- Pension Trust Account
 
13-6123601 001
 
Green
 
Green
 
N/A
 
9,489

 
9,687

 
7,543

 
No
 
April 2019 to June 2020
Plumbers Pipefitters & Mechanical Equipment Service Local Union 392 Pension Plan
 
31-0655223 001
 
Red
 
Red
 
Implemented
 
6,084

 
5,202

 
5,554

 
Yes
 
June 2019
Central Pension Fund of the IUOE & Participating Employers
 
36-6052390 001
 
Green
 
Green
 
N/A
 
6,070

 
6,211

 
6,465

 
No
 
February 2018 to
June 2020
Sheet Metal Workers Pension Plan of Northern California
 
51-6115939 001
 
Red
 
Red
 
Implemented
 
6,023

 
5,164

 
4,851

 
No
 
June 2018 to June 2019
Electrical Contractors Association of the City of Chicago Local Union 134, IBEW Joint Pension Trust of Chicago Pension Plan 2
 
51-6030753 002
 
Green
 
Green
 
N/A
 
5,537

 
5,518

 
5,759

 
No
 
June 2018
 


67
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - RETIREMENT PLANS - (Continued)


Pension Fund
 
EIN/Pension Plan
Number
 
PPA Zone Status (1)
 
FIP/RP
Status
 
Contributions
 
Contributions greater than 5% of total plan contributions (2)
 
Expiration
date of CBA
 
2017
 
2016
 
 
2017
 
2016
 
2015
 
Electrical Workers Local No. 26 Pension Trust Fund
 
52-6117919 001
 
Green
 
Green
 
N/A
 
4,441

 
3,390

 
2,620

 
Yes
 
January 2018 to June 2019
Pipefitters Union Local 537 Pension Fund
 
51-6030859 001
 
Green
 
Green
 
N/A
 
4,057

 
3,970

 
3,939

 
Yes
 
Februray 2018 to August 2021
Southern California Pipe Trades Retirement Fund
 
51-6108443 001
 
Green
 
Green
 
N/A
 
3,907

 
4,371

 
2,743

 
No
 
June 2018 to
August 2019
Eighth District Electrical Pension Fund
 
84-6100393 001
 
Green
 
Green
 
N/A
 
3,786

 
3,444

 
3,411

 
Yes
 
February 2018 to May 2022
Southern California IBEW-NECA Pension Trust Fund
 
95-6392774 001
 
Red
 
Red
 
Pending (3)
 
3,669

 
3,289

 
2,894

 
No
 
June 2019 to
May 2020
Sheet Metal Workers Pension Plan of Southern California, Arizona & Nevada
 
95-6052257 001
 
Yellow
 
Yellow
 
Implemented
 
3,268

 
2,946

 
2,310

 
No
 
June 2018 to June 2020
U.A. Plumbers Local 24 Pension Fund
 
22-6042823 001
 
Green
 
Green
 
N/A
 
3,092

 
3,147

 
2,431

 
Yes
 
April 2020
NECA-IBEW Pension Trust Fund
 
51-6029903 001
 
Green
 
Green
 
N/A
 
3,060

 
3,752

 
1,498

 
No
 
May 2018 to May 2020
Northern California Pipe Trades Pension Plan
 
94-3190386 001
 
Green
 
Green
 
N/A
 
2,963

 
6,495

 
3,544

 
Yes
 
June 2018
San Diego Electrical Pension Plan
 
95-6101801 001
 
Green
 
Green
 
N/A
 
2,862

 
2,216

 
2,109

 
Yes
 
May 2019 to May 2020
Heating, Piping & Refrigeration Pension Fund
 
52-1058013 001
 
Green
 
Green
 
N/A
 
2,437

 
2,402

 
1,948

 
No
 
July 2019
U.A. Local 38 Defined Benefit Pension Plan
 
94-1285319 001
 
Green
 
Yellow
 
N/A
 
2,097

 
1,521

 
1,526

 
No
 
June 2018 to June 2023
Plumbing & Pipe Fitting Local 219 Pension Fund
 
34-6682376 001
 
Red
 
Red
 
Implemented
 
1,335

 
838

 
1,262

 
Yes
 
May 2020
Boilermaker-Blacksmith National Pension Trust
 
48-6168020 001
 
Red
 
Yellow
 
Pending (3)
 
1,083

 
1,710

 
1,367

 
No
 
May 2018 to
September 2020
Steamfitters Local Union No. 420 Pension Plan
 
23-2004424 001
 
Red
 
Red
 
Implemented
 
687

 
709

 
845

 
No
 
May 2020
South Florida Electrical Workers Pension Plan and Trust
 
59-6230530 001
 
Red
 
Yellow
 
Implemented
 
503

 
263

 
116

 
No
 
August 2018
Other Multiemployer Pension Plans
 
 
 
 
 
 
 
 
 
50,720

 
45,622

 
43,834

 
 
 
Various
Total Contributions
 
 
 
 
 
 
 
 
 
$
179,216

 
$
167,297

 
$
147,056

 
 
 
 
 

_________________
(1)
The zone status represents the most recent available information for the respective MEPP, which may be 2016 or earlier for the 2017 year and 2015 or earlier for the 2016 year.
(2)
This information was obtained from the respective plan’s Form 5500 (“Forms”) for the most current available filing. These dates may not correspond with our fiscal year contributions. The above noted percentages of contributions are based upon disclosures contained in the plans’ Forms. Those Forms, among other things, disclose the names of individual participating employers whose annual contributions account for more than 5% of the aggregate annual amount contributed by all participating employers for a plan year. Accordingly, if the annual contribution of two or more of our subsidiaries each accounted for less than 5% of such contributions, but in the aggregate accounted for in excess of 5% of such contributions, that greater percentage is not available and accordingly is not disclosed.
(3)
For these respective plans, a funding surcharge was in effect during 2017.

68
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - RETIREMENT PLANS - (Continued)


The nature and diversity of our business may result in volatility in the amount of our contributions to a particular MEPP for any given period. That is because, in any given market, we could be working on a significant project and/or projects, which could result in an increase in our direct labor force and a corresponding increase in our contributions to the MEPP(s) dictated by the applicable CBA. When that particular project(s) finishes and is not replaced, the number of participants in the MEPP(s) who are employed by us would also decrease, as would our level of contributions to the particular MEPP(s). Additionally, the amount of contributions to a particular MEPP could also be affected by the terms of the CBA, which could require at a particular time, an increase in the contribution rate and/or surcharges. Our contributions to various MEPPs did not significantly increase as a result of acquisitions made since 2015.
We also participated in two MEPPs that are located within the United Kingdom for which we have contributed less than $0.1 million for the year ended December 31, 2017 and $0.2 million for each of the years ended December 31, 2016 and 2015. The decrease in contributions during 2017 was due to the closure of one of these plans. The information that we have obtained relating to these plans is not as readily available and/or as comparable as the information that has been ascertained in the United States. Based upon the most recently available information, the remaining plan is 100% funded.
Additionally, we contribute to certain multiemployer plans that provide post retirement benefits such as health and welfare benefits and/or defined contribution/annuity plans, among others. Our contributions to these plans approximated $130.9 million, $130.5 million and $108.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. Our contributions to other post retirement benefit plans did not significantly increase as a result of acquisitions made since 2015. The amount of contributions to these plans is also subject for the most part to the factors discussed above in conjunction with the MEPPs.
Defined Contribution Plans    
We have defined contribution retirement and savings plans that cover eligible employees in the United States. Contributions to these plans are based on a percentage of the employee’s base compensation. The expenses recognized for the years ended December 31, 2017, 2016 and 2015 for these plans were $28.1 million, $26.8 million and $26.5 million, respectively. At our discretion and subject to applicable plan documents, we may make additional supplemental matching contributions to one of our defined contribution retirement and savings plans. The expenses recognized related to additional supplemental matching for the years ended December 31, 2017, 2016 and 2015 were $5.5 million, $5.4 million and $4.8 million, respectively.
Our United Kingdom subsidiary has defined contribution retirement plans. The expense recognized for the years ended December 31, 2017, 2016 and 2015 was $3.9 million, $3.6 million and $4.0 million, respectively.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Commitments
We lease land, buildings and equipment under various leases. The leases frequently include renewal options and escalation clauses and require us to pay for utilities, taxes, insurance and maintenance expenses.
Future minimum payments, by year and in the aggregate, under capital leases, non-cancelable operating leases and related subleases with initial or remaining terms of one or more years at December 31, 2017, were as follows (in thousands):
 
 
Capital
Leases
 
Operating
Leases
 
Sublease
Income
2018
$
1,478

 
$
73,425

 
$
607

2019
1,778

 
64,177

 
309

2020
1,013

 
51,615

 
216

2021
422

 
39,668

 
125

2022
38

 
25,760

 
34

Thereafter
14

 
48,472

 
—

Total minimum lease payments
4,743

 
$
303,117

 
$
1,291

Amounts representing interest
(172
)
 
 
 
 
Present value of net minimum lease payments
$
4,571

 
 
 
 

69
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - COMMITMENTS AND CONTINGENCIES - (Continued)


Rent expense for operating leases and other rental items, including short-term equipment rentals charged to cost of sales, for the years ended December 31, 2017, 2016 and 2015 was $158.8 million, $143.1 million and $122.0 million, respectively. Rent expense for the years ended December 31, 2017, 2016 and 2015 was reported net of sublease rental income of $0.6 million, $0.6 million and $1.2 million, respectively.
Contractual Guarantees
We have agreements with our executive officers and certain other key management personnel providing for severance benefits for such employees upon termination of their employment under certain circumstances.
In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees.
The terms of our construction contracts frequently require that we obtain from surety companies (“Surety Companies”) and provide to our customers payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. 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 December 31, 2017, based on our percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $927.3 million. Surety Bonds are issued by Surety Companies in return for premiums, which vary depending on the size and type of bond.
We are subject to regulation with respect to the handling of certain materials used in construction, which are classified as hazardous or toxic by federal, state and local agencies. Our practice is to avoid participation in projects principally involving the remediation or removal of such materials. However, when remediation is required as part of our contract performance, we believe we comply with all applicable regulations governing the discharge of material into the environment or otherwise relating to the protection of the environment.
At December 31, 2017, we employed approximately 32,000 people, approximately 57% of whom are represented by various unions pursuant to approximately 400 collective bargaining agreements between our individual subsidiaries and local unions. We believe that our employee relations are generally good. Only two of these collective bargaining agreements are national or regional in scope.
Restructuring expenses, primarily related to employee severance obligations, were $1.6 million, $1.4 million and $0.8 million for 2017, 2016 and 2015, respectively. As of December 31, 2017, 2016 and 2015, the balance of our restructuring related obligations yet to be paid was $0.5 million, $0.2 million and $0.1 million, respectively. The majority of obligations outstanding as of December 31, 2016 and 2015 were paid during 2017 and 2016, respectively. The obligations outstanding as of December 31, 2017 will be paid throughout 2018. No material expenses in connection with restructuring from continuing operations are expected to be incurred during 2018.








70
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - COMMITMENTS AND CONTINGENCIES - (Continued)


The changes in restructuring activity by reportable segments during the years ended December 31, 2017 and December 31, 2016 were as follows (in thousands):
 
United States
electrical
construction
and facilities
services segment
 
United States
mechanical
construction
and facilities
services segment
 
United States
building
services segment
 
Total
Balance at December 31, 2015
$
—

 
$
—

 
$
81

 
$
81

Charges
—

 
519

 
919

 
1,438

Payments
—

 
(331
)
 
(987
)
 
(1,318
)
Balance at December 31, 2016
—

 
188

 
13

 
201

Charges
452

 
180

 
945

 
1,577

Payments
—

 
(368
)
 
(918
)
 
(1,286
)
Balance at December 31, 2017
$
452

 
$
—

 
$
40

 
$
492

A summary of restructuring expenses by reportable segments recognized for the year ended December 31, 2017 was as follows (in thousands):
 
United States
electrical
construction
and facilities
services segment
 
United States
mechanical
construction
and facilities
services segment
 
United States
building
services segment
 
Total
Severance
$
391

 
$
180

 
$
945

 
$
1,516

Leased facilities
61

 
—

 
—

 
61

Total charges
$
452

 
$
180

 
$
945

 
$
1,577

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 Matters     
One of our subsidiaries was a subcontractor to a mechanical contractor (“Mechanical Contractor”) on a construction project where an explosion occurred in 2010. The Mechanical Contractor has asserted claims, in the context of an arbitration proceeding against our subsidiary, alleging that our subsidiary is responsible for a portion of the damages for which the Mechanical Contractor may be liable as a result of: (a) personal injury suffered by individuals as a result of the explosion and (b) the Mechanical Contractor’s legal fees and associated management costs in defending against any and all such claims. The Mechanical Contractor previously asserted claims under the Connecticut and Massachusetts Unfair and Deceptive Practices Acts, but such claims have been withdrawn. The general contractor (as assignee of the Mechanical Contractor) on the construction project, and for whom the Mechanical Contractor worked, has alleged that our subsidiary is responsible for losses asserted by the owner of the project and/or the general contractor because of delays in completion of the project and for damages to the owner’s property. We believe, and have been advised by counsel, that we have a number of meritorious defenses to all such matters. We believe that the ultimate outcome of such matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. Notwithstanding our assessment of the final impact of this matter, we are not able to estimate with any certainty the amount of loss, if any, which would be associated with an adverse resolution.
We are involved in several other 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

71
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - COMMITMENTS AND CONTINGENCIES - (Continued)


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.
NOTE 16 - ADDITIONAL CASH FLOW INFORMATION
The following presents information about cash paid for interest, income taxes and other non-cash financing activities for the years ended December 31, 2017, 2016 and 2015 (in thousands):  
 
2017
 
2016
 
2015
Cash paid during the year for:
 
 
 
 
 
Interest
$
11,456

 
$
11,033

 
$
7,668

Income taxes
$
130,226

 
$
129,540

 
$
99,754

Non-cash financing activities:
 
 
 
 
 
Assets acquired under capital lease obligations
$
1,252

 
$
1,914

 
$
3,847

NOTE 17 - SEGMENT INFORMATION
We have the following reportable segments: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; premises electrical and lighting systems; process instrumentation in the refining, chemical process, food process 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 and 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 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.











72
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - SEGMENT INFORMATION - (Continued)

The following tables present information about industry segments and geographic areas for the years ended December 31, 2017, 2016 and 2015 (in thousands): 
 
2017
 
2016
 
2015
Revenues from unrelated entities:
 
 
 
 
 
United States electrical construction and facilities services
$
1,829,567

 
$
1,704,403

 
$
1,367,142

United States mechanical construction and facilities services
2,963,815

 
2,643,321

 
2,293,038

United States building services
1,753,703

 
1,810,229

 
1,758,984

United States industrial services
799,169

 
1,067,315

 
922,085

Total United States operations
7,346,254

 
7,225,268

 
6,341,249

United Kingdom building services
340,745

 
326,256

 
377,477

Total worldwide operations
$
7,686,999

 
$
7,551,524

 
$
6,718,726

 
 
 
 
 
 
Total revenues:
 
 
 
 
 
United States electrical construction and facilities services
$
1,836,985

 
$
1,728,920

 
$
1,378,620

United States mechanical construction and facilities services
2,994,700

 
2,662,100

 
2,306,958

United States building services
1,812,763

 
1,864,824

 
1,813,811

United States industrial services
801,531

 
1,068,662

 
923,648

Less intersegment revenues
(99,725
)
 
(99,238
)
 
(81,788
)
Total United States operations
7,346,254

 
7,225,268

 
6,341,249

United Kingdom building services
340,745

 
326,256

 
377,477

Total worldwide operations
$
7,686,999

 
$
7,551,524

 
$
6,718,726

Operating income (loss):
 
 
 
 
 
United States electrical construction and facilities services
$
150,001

 
$
101,761

 
$
82,225

United States mechanical construction and facilities services
212,320

 
132,667

 
138,444

United States building services
81,504

 
76,845

 
70,776

United States industrial services
19,084

 
77,845

 
56,469

Total United States operations
462,909

 
389,118

 
347,914

United Kingdom building services
14,849

 
11,946

 
11,634

Corporate administration
(87,808
)
 
(88,740
)
 
(71,642
)
Restructuring expenses
(1,577
)
 
(1,438
)
 
(824
)
Impairment loss on goodwill and identifiable intangible assets
(57,819
)
 
(2,428
)
 
—

Total worldwide operations
330,554

 
308,458

 
287,082

Other corporate items:
 
 
 
 
 
Interest expense
(12,770
)
 
(12,627
)
 
(8,932
)
Interest income
965

 
663

 
673

Income from continuing operations before income taxes
$
318,749

 
$
296,494

 
$
278,823


73
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - SEGMENT INFORMATION - (Continued)

 
2017
 
2016
 
2015
Capital expenditures:
 

 
 

 
 

United States electrical construction and facilities services
$
4,797

 
$
5,294

 
$
6,063

United States mechanical construction and facilities services
6,778

 
7,672

 
5,312

United States building services
10,745

 
11,080

 
7,266

United States industrial services
9,583

 
10,065

 
11,073

Total United States operations
31,903

 
34,111

 
29,714

United Kingdom building services
2,166

 
4,523

 
5,298

Corporate administration
615

 
1,014

 
448

Total worldwide operations
$
34,684

 
$
39,648

 
$
35,460

 
 
 
 
 
 
Depreciation and amortization of Property, plant and equipment:
 
 
 
 
 
United States electrical construction and facilities services
$
6,545

 
$
6,318

 
$
4,676

United States mechanical construction and facilities services
7,819

 
7,544

 
7,562

United States building services
11,051

 
10,241

 
9,896

United States industrial services
10,274

 
10,394

 
9,629

Total United States operations
35,689

 
34,497

 
31,763

United Kingdom building services
3,371

 
3,560

 
3,603

Corporate administration
855

 
824

 
928

Total worldwide operations
$
39,915

 
$
38,881

 
$
36,294

Costs and estimated earnings in excess of billings on uncompleted contracts:
 

 
 

 
 
United States electrical construction and facilities services
$
35,060

 
$
46,193

 
$
39,116

United States mechanical construction and facilities services
52,381

 
46,703

 
45,787

United States building services
26,028

 
28,084

 
21,392

United States industrial services
1,636

 
2,572

 
3,358

Total United States operations
115,105

 
123,552

 
109,653

United Kingdom building services
7,516

 
7,145

 
8,081

Total worldwide operations
$
122,621

 
$
130,697

 
$
117,734

 
 
 
 
 
 
Billings in excess of costs and estimated earnings on uncompleted contracts:
 

 
 

 
 
United States electrical construction and facilities services
$
178,454

 
$
163,794

 
$
139,857

United States mechanical construction and facilities services
290,216

 
271,811

 
237,623

United States building services
48,481

 
50,546

 
45,316

United States industrial services
3,098

 
1,823

 
1,170

Total United States operations
520,249

 
487,974

 
423,966

United Kingdom building services
3,907

 
1,268

 
5,269

Total worldwide operations
$
524,156

 
$
489,242

 
$
429,235

 
 

 
 

 
 

74
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 - SEGMENT INFORMATION - (Continued)

 
2017
 
2016
 
2015
Long-lived assets:
 
 
 
 
 
United States electrical construction and facilities services
$
180,990

 
$
183,632

 
$
20,139

United States mechanical construction and facilities services
352,970

 
287,744

 
294,969

United States building services
409,718

 
401,154

 
380,031

United States industrial services
630,184

 
709,267

 
730,413

Total United States operations
1,573,862

 
1,581,797

 
1,425,552

United Kingdom building services
11,729

 
11,446

 
10,927

Corporate administration
1,494

 
1,734

 
1,543

Total worldwide operations
$
1,587,085

 
$
1,594,977

 
$
1,438,022

Total assets:
 
 
 
 
 
United States electrical construction and facilities services
$
617,471

 
$
631,581

 
$
372,525

United States mechanical construction and facilities services
1,097,240

 
954,633

 
888,322

United States building services
764,085

 
753,434

 
727,697

United States industrial services
772,899

 
850,434

 
883,338

Total United States operations
3,251,695

 
3,190,082

 
2,871,882

United Kingdom building services
131,806

 
105,081

 
133,782

Corporate administration
582,403

 
557,275

 
501,042

Total worldwide operations
$
3,965,904

 
$
3,852,438

 
$
3,506,706


During 2017, we recognized $18.1 million of gross profit associated with the recovery of certain contract costs previously disputed on a project completed in the prior year. During 2016, we incurred $19.4 million of losses on a transportation project within our United States electrical construction and facilities services segment as a result of productivity issues attributable to unfavorable job-site conditions. In addition, within the United States mechanical construction and facilities services segment, we incurred $18.3 million of losses on a project at a process facility as a result of a contract dispute with our customer and $9.6 million of losses on an institutional project due to project delays and unfavorable job-site conditions. The results of our United States mechanical construction and facilities services segment included revenues of $12.1 million recognized during 2015 as a result of the settlement of a claim on an institutional project located in the Southeastern region of the United States.

75
EMCOR Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18 - SELECTED UNAUDITED QUARTERLY INFORMATION
(In thousands, except per share data)
Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year. The results of the construction operations of our United Kingdom segment for all periods are presented as discontinued operations.
 
 
March 31
 
June 30
 
Sept. 30
 
Dec. 31
2017 Quarterly Results
 
 
 
 
 
 
 
 
Revenues
 
$
1,891,732

 
$
1,895,937

 
$
1,886,691

 
$
2,012,639

Gross profit
 
$
266,340

 
$
274,501

 
$
295,070

 
$
311,101

Impairment loss on goodwill and identifiable intangible assets
 
$
—

 
$
—

 
$
—

 
$
57,819

Net income attributable to EMCOR Group, Inc.
 
$
52,640

 
$
56,758

 
$
64,597

 
$
53,201

Basic EPS from continuing operations
 
$
0.89

 
$
0.96

 
$
1.10

 
$
0.91

Basic EPS from discontinued operation
 
(0.01
)
 
(0.00
)
 
(0.00
)
 
(0.00
)
 
 
$
0.88

 
$
0.96

 
$
1.10

 
$
0.91

Diluted EPS from continuing operations
 
$
0.88

 
$
0.95

 
$
1.09

 
$
0.90

Diluted EPS from discontinued operation
 
(0.01
)
 
(0.00
)
 
(0.00
)
 
(0.00
)
 
 
$
0.87

 
$
0.95

 
$
1.09

 
$
0.90

 
 
 
March 31
 
June 30
 
Sept. 30
 
Dec. 31
2016 Quarterly Results
 
 
 
 
 
 
 
 
Revenues
 
$
1,744,970

 
$
1,933,416

 
$
1,923,174

 
$
1,949,964

Gross profit
 
$
223,108

 
$
274,741

 
$
268,044

 
$
271,969

Impairment loss on identifiable intangible assets
 
$
—

 
$
—

 
$
—

 
$
2,428

Net income attributable to EMCOR Group, Inc.
 
$
34,348

 
$
55,380

 
$
51,531

 
$
40,676

Basic EPS from continuing operations
 
$
0.57

 
$
0.93

 
$
0.85

 
$
0.70

Basic EPS from discontinued operation
 
(0.00
)
 
(0.02
)
 
(0.01
)
 
(0.03
)
 
 
$
0.57

 
$
0.91

 
$
0.84

 
$
0.67

Diluted EPS from continuing operations
 
$
0.56

 
$
0.92

 
$
0.85

 
$
0.69

Diluted EPS from discontinued operation
 
(0.00
)
 
(0.02
)
 
(0.01
)
 
(0.03
)
 
 
$
0.56

 
$
0.90

 
$
0.84

 
$
0.66


76

Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of EMCOR Group, Inc. and subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of EMCOR Group, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/  ERNST & YOUNG LLP
 
We have served as the Company’s auditor since 2002.

Stamford, Connecticut
 
February 22, 2018
 


77

Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of EMCOR Group, Inc. and subsidiaries:
Opinion on Internal Control over Financial Reporting
We have audited EMCOR Group, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, EMCOR Group, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2017 consolidated financial statements of the Company and our report dated February 22, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/  ERNST & YOUNG LLP
 
 
 
Stamford, Connecticut
 
February 22, 2018
 
 


78

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Based on an evaluation of our disclosure controls and procedures (as required by Rules 13a-15(b) of the Securities Exchange Act of 1934), our President and Chief Executive Officer, Anthony J. Guzzi, and our Executive Vice President and Chief Financial Officer, Mark A. Pompa, have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) are effective as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934). Our internal control over financial reporting is a process designed with the participation of our principal executive officer and principal financial officer or persons performing similar functions to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets, (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, our disclosure controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2017, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has determined that EMCOR’s internal control over financial reporting is effective as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report appearing in this Annual Report on Form 10-K, which such report expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2017.
Changes in Internal Control over Financial Reporting
In addition, our management with the participation of our principal executive officer and principal financial officer or persons performing similar functions has determined that no change in our internal control over financial reporting (as that term is defined in Rules 13(a)-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934) occurred during the fourth quarter of our fiscal year ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.


79

PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 with respect to directors is incorporated herein by reference to the Section of our definitive Proxy Statement for the 2018 Annual Meeting of Stockholders entitled “Election of Directors”, which Proxy Statement is to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year to which this Form 10-K relates (the “Proxy Statement”). The information required by this Item 10 concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the section of the Proxy Statement entitled “Section 16(a) Beneficial Ownership Reporting Compliance”. The information required by this Item 10 concerning the Audit Committee of our Board of Directors and Audit Committee financial experts is incorporated by reference to the section of the Proxy Statement entitled “Meetings and Committees of the Board of Directors” and “Corporate Governance”. Information regarding our executive officers is contained in Part I of this Form 10-K following Item 4 under the heading “Executive Officers of the Registrant”. We have adopted a Code of Ethics that applies to our Chief Executive Officer and our Senior Financial Officers, which is listed on the Exhibit Index.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference to the sections of the Proxy Statement entitled “Compensation Discussion and Analysis”, “Executive Compensation and Related Information”, “Potential Post Employment Payments”, “Director Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report”.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 (other than the information required by Section 201(d) of Regulation S-K, which is set forth in Part II, Item 5 of this Form 10-K) is incorporated herein by reference to the sections of the Proxy Statement entitled “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management”.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item 13 is incorporated herein by reference to the sections of the Proxy Statement entitled “Compensation Committee Interlocks and Insider Participation” and “Corporate Governance”.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 is incorporated herein by reference to the section of the Proxy Statement entitled “Ratification of Appointment of Independent Auditors”.

80

PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  
(a)(1)
The following consolidated financial statements of EMCOR Group, Inc. and Subsidiaries are filed as part of this report under Part II, Item 8. Financial Statements and Supplementary Data:
 
 
 
Financial Statements:
 
 
 
Consolidated Balance Sheets - December 31, 2017 and 2016
 
 
 
Consolidated Statements of Operations - Years Ended December 31, 2017, 2016 and 2015
 
 
 
Consolidated Statements Comprehensive Income - Years Ended December 31, 2017, 2016 and 2015
 
 
 
Consolidated Statements of Cash Flows - Years Ended December 31, 2017, 2016 and 2015
 
 
 
Consolidated Statements of Equity - Years Ended December 31, 2017, 2016 and 2015
 
 
 
Notes to Consolidated Financial Statements
 
 
 
Reports of Independent Registered Public Accounting Firm
 
 
(a)(2)
The following financial statement schedule is included in this Form 10-K report: Schedule II - Valuation and Qualifying Accounts
 
 
 
All other schedules are omitted because they are not required, are inapplicable, or the information is otherwise shown in the consolidated financial statements or notes thereto.
 
 
(a)(3)
For the list of exhibits, see the Exhibit Index immediately following the signature page hereof, which Exhibit Index is incorporated herein by reference.

81

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 22, 2018
 
 
EMCOR GROUP, INC.
 
(Registrant)
 
 
BY:
/s/ ANTHONY J. GUZZI
 
Anthony J. Guzzi
 
President and Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 22, 2018.
 
/S/  ANTHONY J. GUZZI
President, Chief Executive Officer and Director
Anthony J. Guzzi
(Principal Executive Officer)
 
 
/S/  MARK A. POMPA
Executive Vice President and Chief Financial Officer
Mark A. Pompa
(Principal Financial and Accounting Officer)
 
 
/S/  STEPHEN W. BERSHAD
Chairman of the Board of Directors
Stephen W. Bershad
 
 
 
/S/  JOHN W. ALTMEYER
Director
John W. Altmeyer
 
 
 
/S/  DAVID A. B. BROWN
Director
David A. B. Brown
 
 
 
/S/  RICHARD F. HAMM, JR.
Director
Richard F. Hamm, Jr.
 
 
 
/S/  DAVID H. LAIDLEY
Director
David H. Laidley
 
 
 
/S/  CAROL P. LOWE
Director
Carol P. Lowe
 
 
 
/S/  M. KEVIN MCEVOY
Director
M. Kevin McEvoy
 
 
 
/S/  WILLIAM P. REID
Director
William P. Reid
 
 
 
/S/  JERRY E. RYAN
Director
Jerry E. Ryan
 
 
 
/s/  STEVEN B. SCHWARZWAELDER
Director
Steven B. Schwarzwaelder
 
 
 
/S/  MICHAEL T. YONKER
Director
Michael T. Yonker
 
 

82

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
 
Description
 
Balance  at
Beginning
of Year 
 
Costs and
Expenses
 
Deductions (1)
 
Balance at  
End  of Year
Allowance for doubtful accounts
 
 
 
 
 
 
 
 
Year Ended December 31, 2017
 
$
12,252

 
7,264

 
(2,286
)
 
$
17,230

Year Ended December 31, 2016
 
$
11,175

 
6,194

 
(5,117
)
 
$
12,252

Year Ended December 31, 2015
 
$
10,424

 
2,853

 
(2,102
)
 
$
11,175

_________________
(1)
Deductions primarily represent uncollectible balances of accounts receivable written off, net of recoveries.


83

EXHIBIT INDEX

Exhibit
No.
 
Description
 
Incorporated By Reference to or
Filed Herewith, as Indicated Below
 
 
 
 
 
2(a-1)
 
Purchase Agreement dated as of February 11, 2002 by and among Comfort Systems USA, Inc. and EMCOR-CSI Holding Co.
 
2(a-2)
 
Purchase and Sale Agreement dated as of August 20, 2007 between FR X Ohmstede Holdings LLC and EMCOR Group, Inc.
 
2(a-3)
 
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.
 
3(a-1)
 
Restated Certificate of Incorporation of EMCOR filed December 15, 1994
 
3(a-2)
 
Amendment dated November 28, 1995 to the Restated Certificate of Incorporation of EMCOR
 
3(a-3)
 
Amendment dated February 12, 1998 to the Restated Certificate of Incorporation of EMCOR
 
3(a-4)
 
Amendment dated January 27, 2006 to the Restated Certificate of Incorporation of EMCOR
 
3(a-5)
 
Amendment dated September 18, 2007 to the Restated Certificate of Incorporation of EMCOR
 
3(b)
 
Amended and Restated By-Laws and Amendments thereto
 
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”)
 
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
 
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
 

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
 



84

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 Sheldon I. Cammaker, R. Kevin Matz and Mark A. Pompa
 
10(b)
 
Form of Amendment to Severance Agreement between EMCOR and each of Sheldon I. Cammaker, R. Kevin Matz and Mark A. Pompa
 
10(c)
 
Letter Agreement dated October 12, 2004 between Anthony Guzzi and EMCOR (the “Guzzi Letter Agreement”)
 
10(d)
 
Form of Confidentiality Agreement between Anthony Guzzi and EMCOR
 
10(e)
 
Form of Indemnification Agreement between EMCOR and each of its officers and directors
 
10(f-1)
 
Severance Agreement (“Guzzi Severance Agreement”) dated October 25, 2004 between Anthony Guzzi and EMCOR
 
10(f-2)
 
Amendment to Guzzi Severance Agreement
 
10(g-1)
 
Continuity Agreement dated as of June 22, 1998 between Sheldon I. Cammaker and EMCOR (“Cammaker Continuity Agreement”)
 
10(g-2)
 
Amendment dated as of May 4, 1999 to Cammaker Continuity Agreement
 
10(g-3)
 
Amendment dated as of March 1, 2007 to Cammaker Continuity Agreement
 
10(h-1)
 
Continuity Agreement dated as of June 22, 1998 between R. Kevin Matz and EMCOR (“Matz Continuity Agreement”)
 
10(h-2)
 
Amendment dated as of May 4, 1999 to Matz Continuity Agreement
 
10(h-3)
 
Amendment dated as of January 1, 2002 to Matz Continuity Agreement
 
10(h-4)
 
Amendment dated as of March 1, 2007 to Matz Continuity Agreement
 
10(i-1)
 
Continuity Agreement dated as of June 22, 1998 between Mark A. Pompa and EMCOR (“Pompa Continuity Agreement”)
 
10(i-2)
 
Amendment dated as of May 4, 1999 to Pompa Continuity Agreement
 
10(i-3)
 
Amendment dated as of January 1, 2002 to Pompa Continuity Agreement
 
10(i-4)
 
Amendment dated as of March 1, 2007 to Pompa Continuity Agreement
 
10(j-1)
 
Change of Control Agreement dated as of October 25, 2004 between Anthony Guzzi (“Guzzi”) and EMCOR (“Guzzi Continuity Agreement”)
 
10(j-2)
 
Amendment dated as of March 1, 2007 to Guzzi Continuity Agreement
 
10(j-3)
 
Amendment to Continuity Agreements and Severance Agreements with Sheldon I. Cammaker, Anthony J. Guzzi, R. Kevin Matz and Mark A. Pompa
 



85

EXHIBIT INDEX

Exhibit
No.
 
Description
 
Incorporated By Reference to or
Filed Herewith, as Indicated Below
 
 
 
 
 
10(k-1)
 
Amendment dated as of March 29, 2010 to Severance Agreement with Sheldon I. Cammaker, Anthony J. Guzzi, R. Kevin Matz and Mark A. Pompa
 
10(k-2)
 
Third Amendment to Severance Agreement dated June 4, 2015 between EMCOR and Sheldon I. Cammaker
 
10(l-1)
 
Severance Agreement dated as of October 26, 2016 between EMCOR and Maxine L. Mauricio
 
10(l-2)
 
Continuity Agreement dated as of October 26, 2016 between EMCOR and Maxine L. Mauricio (“Mauricio Continuity Agreement”)
 
10(l-3)
 
Amendment dated April 10, 2017 to Mauricio Continuity Agreement
 
10(m-1)
 
EMCOR Group, Inc. Long-Term Incentive Plan (“LTIP”)
 
10(m-2)
 
First Amendment to LTIP and updated Schedule A to LTIP
 
10(m-3)
 
Second Amendment to LTIP
 
10(m-4)
 
Third Amendment to LTIP
 
10(m-5)
 
Fourth Amendment to LTIP
 
10(m-6)
 
Form of Certificate Representing Stock Units issued under LTIP
 
10(m-7)
 
Fifth Amendment to LTIP
 
10(m-8)
 
Sixth Amendment to LTIP
 
10(n)
 
Key Executive Incentive Bonus Plan, as amended and restated
 
10(o-1)
 
2007 Incentive Plan
 
10(o-2)
 
Form of Option Agreement under 2007 Incentive Plan between EMCOR and each non-employee director electing to receive options as part of annual retainer
 
10(p-1)
 
Amended and Restated 2010 Incentive Plan
 
10(p-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
 
10(p-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
 









86

EXHIBIT INDEX

Exhibit
No.
 
Description
 
Incorporated By Reference to or
Filed Herewith, as Indicated Below
 
 
 
 
 
10(q)
 
EMCOR Group, Inc. Employee Stock Purchase Plan
 
10(r)
 
Director Award Program Adopted May 13, 2011, as amended and restated December 14, 2011
 
10(s)
 
Amendment to Option Agreements
 
10(t)
 
Form of Non-LTIP Stock Unit Certificate
 
10(u)
 
Form of Director Restricted Stock Unit Agreement
 
10(v)
 
Director Award Program, as Amended and Restated December 16, 2014
 
10(w)
 
EMCOR Group, Inc. Voluntary Deferral Plan
 
10(x)
 
First Amendment to EMCOR Group, Inc. Voluntary Deferral Plan
 

10(y)
 
Form of Executive Restricted Stock Unit Agreement
 
10(z)
 
Restricted Stock Unit Award Agreement dated October 23, 2013 between EMCOR and Stephen W. Bershad
 

10(a)(a)
 
Restricted Stock Unit Award Agreement dated June 11, 2014 between EMCOR and Stephen W. Bershad
 
10(b)(b)
 
Restricted Stock Unit Award Agreement dated June 11, 2015 between EMCOR and Stephen W. Bershad
 
10(c)(c)
 
Restricted Stock Unit Award Agreement dated October 29, 2015 between EMCOR and Steven B. Schwarzwaelder
 
10(d)(d)
 
Restricted Stock Unit Award Agreement dated June 2, 2016 between EMCOR and Stephen W. Bershad
 
10(e)(e)
 
Executive Compensation Recoupment Policy
 
10(f)(f)
 
Restricted Stock Unit Award Agreement dated June 30, 2017 between EMCOR and Mark A. Pompa
 
11
 
Computation of Basic EPS and Diluted EPS for the years ended December 31, 2017 and 2016
 
14
 
Code of Ethics of EMCOR for Chief Executive Officer and Senior Financial Officers
 
21
 
List of Significant Subsidiaries
 
23.1
 
Consent of Ernst & Young LLP
 
31.1
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Anthony J. Guzzi, the President and Chief Executive Officer
 
31.2
 
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Mark A. Pompa, the Executive Vice President and Chief Financial Officer
 
32.1
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the President and Chief Executive Officer
 
32.2
 
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Executive Vice President and Chief Financial Officer
 


87

EXHIBIT INDEX

Exhibit
No.
 
Description
 
Incorporated By Reference to or
Filed Herewith, as Indicated Below
 
 
 
 
 
95
 
Information concerning mine safety violations or other regulatory matters
 
101
 
The following materials from EMCOR Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Equity and (vi) the Notes to Consolidated Financial Statements.
 
Filed
 
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, upon request of the Securities and Exchange Commission, the Registrant hereby undertakes to furnish a copy of any unfiled instrument which defines the rights of holders of long-term debt of the Registrant’s subsidiaries.

88