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.

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.

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

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(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.

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.

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

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(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.

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

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.

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.

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

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

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.

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

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

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

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

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.

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.

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.

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

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

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.

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

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	%

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.

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.

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

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

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.

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

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.

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

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.

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

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

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.

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

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

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