EMCOR Group, Inc. — 2Q17 Form 10-Q Summary
Business context and reporting period
EMCOR is a U.S.-focused electrical and mechanical construction, building services and industrial services company operating through approximately 75 subsidiaries and joint ventures in the United States and United Kingdom. The filing covers the quarter and six months ended June 30, 2017; results are unaudited and are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Year-over-year change | Six months ended June 30, 2017 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $1.896 billion | Down 1.9% | $3.788 billion | Up 3.0% |
| Gross profit | $274.5 million | Essentially flat | $540.8 million | Up $43.0 million |
| Gross margin | 14.5% | Up from 14.2% | 14.3% | Up from 13.5% |
| Operating income | $92.8 million | Up 0.6% | $175.6 million | Up 18.7% |
| Operating margin | 4.9% | Up from 4.8% | 4.6% | Up from 4.0% |
| Net income attributable to EMCOR | $56.8 million | Up 2.5% | $109.4 million | Up 21.9% |
| Diluted EPS from continuing operations | $0.95 | Up from $0.92 | $1.84 | Up from $1.48 |
| Operating cash flow | Not separately provided | — | $102.9 million | Up from $47.8 million |
Cash and cash equivalents were $385.4 million at June 30, 2017, down from $464.6 million at December 31, 2016. Total debt was $417.2 million, including $125.0 million drawn under the revolving facility and $292.4 million under the term loan. The $900 million revolving credit facility expires August 3, 2021; approximately $105.8 million of letters of credit were outstanding. EMCOR was in compliance with its debt covenants.
Backlog was $4.10 billion at June 30, 2017, up from $3.90 billion at December 31, 2016 and $3.81 billion at June 30, 2016. Net over-billings were $390.9 million, compared with $358.5 million at year-end 2016.
Material changes versus the prior comparable period
- Second-quarter revenue declined primarily because of lower U.S. industrial services activity, including reduced large-project and turnaround work, and lower U.S. and U.K. building services revenue.
- Six-month revenue increased mainly through growth in U.S. electrical and mechanical construction and acquired mobile mechanical services.
- U.S. electrical construction operating income benefited from improved performance and the absence of a $10.5 million transportation-project loss recorded in second-quarter 2016.
- U.S. mechanical construction benefited from recovery of previously disputed contract costs, contributing $11.6 million of gross profit in the quarter and $18.1 million year to date.
- The industrial services segment weakened substantially: second-quarter revenue fell $146.0 million and operating income fell $28.8 million; six-month revenue fell $145.0 million and operating income fell $30.6 million.
- Two businesses were acquired in January and March 2017 for total consideration of $84.8 million, contributing incremental revenue and increasing goodwill and identifiable intangible assets.
- EMCOR repurchased approximately 1.0 million shares for $63.4 million during 2017 through June 30; approximately $102.1 million remained authorized. The quarterly dividend remained $0.08 per share.
Outlook, commentary, risks and unusual items
Management stated that current cash, expected operating cash flow and available borrowing capacity should be sufficient for foreseeable liquidity and capital expenditure needs. No specific earnings or revenue guidance was provided in the filing.
- Demand for nonresidential construction, building services and industrial services remains dependent on macroeconomic conditions, interest rates and government economic policy.
- Industrial services performance is sensitive to industrial and oil and gas demand; continued weakness could increase goodwill or intangible-asset impairment risk.
- U.K. revenue was negatively affected by unfavorable British pound exchange rates, including an estimated $9.6 million impact in the quarter and $21.9 million impact for the six months.
- Variable-rate debt creates interest-rate exposure; a 100-basis-point rate increase was estimated to raise after-tax interest expense by approximately $2.5 million over the next twelve months.
- Construction contracts involve estimation risk, including percentage-of-completion estimates, collectibility of receivables, claims and unapproved change orders. The filing states that $18.1 million of gross profit recognized in 2017 related to recovery of previously disputed costs.
- Surety-bond exposure was estimated at approximately $1.2 billion based on bonded project obligations. Reduced availability of surety bonds could materially affect bidding capacity, liquidity or results.
- Legal proceedings, government audits and investigations are considered unlikely by management to have a material effect, but litigation outcomes cannot be predicted with certainty.
- The company expects to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. No material overall impact is currently anticipated, although certain U.S. industrial shop-services revenue may be recognized earlier.
- U.K. construction operations remain discontinued; discontinued-operation losses were $0.5 million for the first six months, primarily from legal costs related to final project settlements.
Important facts for investors to verify
- Whether the recovery of disputed contract costs is nonrecurring and how normalized construction margins compare with reported margins.
- Whether industrial services demand, turnaround activity and large-project volume recover or continue to decline.
- Acquisition integration, intangible-asset amortization and the preliminary allocation of the 2017 acquisitions.
- Backlog conversion, cancellation exposure and the collectibility of $1.5 billion of net accounts receivable and contract-related balances.
- Available revolver capacity after borrowings and letters of credit, debt covenant headroom and sensitivity to higher interest rates.
- Potential effects of the 2018 revenue-recognition adoption, future goodwill impairment testing and unresolved litigation or tax matters.