EMCOR Group, Inc. — 2018 Q2 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018, compared with the corresponding 2017 periods. EMCOR provides electrical and mechanical construction, facilities, building, and industrial services through approximately 75 operating subsidiaries and joint ventures in the United States and United Kingdom.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Revenue | $1.954 billion | $1.896 billion | $3.854 billion | $3.788 billion |
| Gross profit | $290.8 million | $274.5 million | $560.0 million | $540.8 million |
| Gross margin | 14.9% | 14.5% | 14.5% | 14.3% |
| Operating income | $99.7 million | $92.4 million | $177.7 million | $174.8 million |
| Operating margin | 5.1% | 4.9% | 4.6% | 4.6% |
| Net income attributable to EMCOR | $70.8 million | $56.8 million | $126.2 million | $109.4 million |
| Diluted EPS from continuing operations | $1.21 | $0.95 | $2.15 | $1.84 |
- Q2 revenue increased 3.1%; six-month revenue increased 1.8%.
- Q2 operating income increased 7.8%; six-month operating income increased 1.6%.
- Q2 net income attributable to EMCOR increased 24.8%; six-month net income increased 15.4%.
- SG&A was $189.9 million in Q2 and $380.9 million year to date, representing 9.7% and 9.9% of revenue, respectively, versus 9.6% in both 2017 comparison periods.
- Cash flow from operations was negative $32.7 million year to date, versus positive $102.7 million in 2017, primarily due to timing of customer receipts, payments for incentive awards, and vendor payments.
- Cash, cash equivalents, and restricted cash totaled $309.2 million at June 30, 2018, down from $469.4 million at December 31, 2017.
- Total debt was $303.1 million, including $25.0 million drawn on the revolving facility and $277.2 million under the term loan. The company was in compliance with all debt covenants.
- Total assets were $3.869 billion and total equity was $1.735 billion at June 30, 2018.
Material changes versus the prior comparable period
- Electrical construction revenue increased to $479.5 million in Q2 from $449.2 million, while operating income increased to $36.0 million from $32.1 million.
- Mechanical construction revenue was broadly flat in Q2 at $740.7 million versus $741.8 million, but operating income increased to $57.6 million from $53.1 million.
- Building services revenue increased 5.2% in Q2 to $461.0 million, with operating income increasing to $22.4 million from $20.2 million.
- Industrial services revenue declined 10.8% in Q2 and 21.0% year to date, primarily because large 2017 turnaround projects did not recur. Segment operating income declined to $1.1 million in Q2 and $4.5 million year to date.
- United Kingdom building services revenue increased 33.3% in Q2 and 34.3% year to date, aided by increased project activity, new awards, and favorable British pound exchange rates.
- 2017 results benefited from $11.6 million of gross profit in Q2 and $18.1 million year to date from recovery of disputed contract costs. This benefit did not recur in 2018.
- The effective tax rate declined to 27.2% in Q2 and 27.1% year to date, from 36.8% and 35.3%, respectively, primarily because of the Tax Cuts and Jobs Act.
- EMCOR repurchased 796,250 shares for approximately $60.5 million during the first half of 2018 and had approximately $114.2 million of remaining authorization at June 30.
Backlog, outlook, risks, and unusual items
- Remaining performance obligations were $3.673 billion at June 30, 2018, including $2.961 billion expected to be recognized within one year. This compares with $3.604 billion at March 31, 2018.
- The company stated that current cash, revolving-credit capacity, expected operating cash flow, and other financing sources should be sufficient for short-term and foreseeable long-term liquidity needs. No formal earnings or revenue guidance is provided in the filing.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. The cumulative reduction to retained earnings was $0.9 million; the reported-period impact was not material and did not affect operating cash flow.
- A $0.9 million non-cash impairment charge was recorded for a finite-lived trade name in the United States industrial services segment.
- United States industrial services remains exposed to demand in industrial and oil and gas markets. Further deterioration could increase goodwill or intangible-asset impairment risk.
- Construction contracts involve estimates of costs to complete, change orders, claims, variable consideration, collectibility, and contract timing. No significant contract estimate changes or losses were recognized during the periods presented.
- Surety-bond exposure was approximately $1.1 billion based on estimated exposure assuming defaults on existing bonded obligations. Reduced surety availability could limit bidding activity or require alternative collateral.
- The company is subject to government audits, investigations, litigation, self-insurance exposures, and an arbitration related to a 2010 construction-site explosion. Management does not currently expect these matters to have a material effect, but one legal matter cannot be estimated with certainty.
- Variable-rate debt creates interest-rate risk; a 100-basis-point increase in rates would increase after-tax interest expense by approximately $2.2 million over the next twelve months, based on June 30 borrowings.
- Additional risks include macroeconomic weakness, reduced non-residential construction demand, commodity and fuel costs, customer credit deterioration, foreign exchange movements, and working-capital demands from long-duration or arrears-billed contracts.
Important facts for investors to verify
- Whether the weak industrial-services performance is temporary or reflects a sustained decline in turnaround and oil-and-gas demand.
- Conversion of the $3.673 billion remaining performance obligations into revenue and cash flow, including cancellation provisions and project-margin assumptions.
- Customer collections, contract assets of $156.1 million, and the effect of billing timing on operating cash flow.
- Available revolving-credit capacity after borrowings and approximately $110.3 million of outstanding letters of credit, together with covenant headroom.
- Potential future goodwill or intangible-asset impairments, particularly for United States industrial services.
- Resolution and potential financial impact of litigation, government matters, surety obligations, and self-insured claims.
- Whether share repurchases and dividends remain consistent with operating cash generation and debt-agreement restrictions.