EMCOR Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015; filed July 30, 2015. The unaudited results cover electrical and mechanical construction, building services and industrial services operations in the United States and building services in the United Kingdom. United Kingdom construction operations were discontinued in 2014 and are presented as discontinued operations.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $1.653 billion | $1.553 billion | $3.242 billion | $3.143 billion |
| Gross profit | $239.5 million | $220.2 million | $456.5 million | $436.4 million |
| Gross margin | 14.5% | 14.2% | 14.1% | 13.9% |
| Operating income | $77.7 million | $69.7 million | $133.0 million | $141.8 million |
| Operating margin | 4.7% | 4.5% | 4.1% | 4.5% |
| Net income attributable to EMCOR | $46.8 million | $39.9 million | $79.7 million | $81.2 million |
| Diluted EPS | $0.74 | $0.59 | $1.25 | $1.19 |
Q2 revenue increased 6.4% year over year and represented a company record for a second quarter. Six-month revenue increased approximately 3.1%. Q2 diluted continuing-operations EPS increased to $0.74 from $0.61, while six-month diluted continuing-operations EPS increased to $1.26 from $1.24.
- Cash flow: Operating activities used $6.1 million in the first six months of 2015, compared with $39.6 million provided in the prior-year period. Investing activities used $14.4 million, including $15.8 million of capital expenditures, and financing activities used $50.8 million.
- Cash and liquidity: Cash and cash equivalents were $360.8 million at June 30, 2015, down from $432.1 million at December 31, 2014. The decline primarily reflected working-capital investment, debt repayments, dividends, share repurchases and distributions to noncontrolling interests.
- Debt: Total debt and capital lease obligations were $326.3 million, including a $323.8 million term loan. No revolving-credit borrowings were outstanding. The company had a $750 million revolving facility expiring November 25, 2018 and was in compliance with its debt covenants.
- Working capital: Accounts receivable increased to $1.309 billion from $1.234 billion at year-end, while costs and estimated earnings in excess of billings increased to $135.9 million. Net over-billings were $249.1 million versus $265.4 million at December 31, 2014.
- Capital returns: The company paid $10.1 million in dividends and repurchased approximately 0.5 million shares for $21.1 million during 2015. Quarterly dividends were $0.08 per share, and approximately $145.3 million remained available under the repurchase authorization.
- Backlog: Backlog was $3.624 billion at June 30, 2015, broadly consistent with $3.634 billion at December 31, 2014 and $3.632 billion at June 30, 2014.
Material changes versus the prior comparable period
- Q2 operating income rose 11.6% year over year, led by stronger results in all United States segments. The six-month operating income decline was attributable primarily to weaker first-half performance in United States electrical construction, United States industrial services and United Kingdom building services, along with higher corporate expenses.
- United States industrial services revenue increased $47.9 million in Q2 and $48.7 million for six months, but six-month operating income decreased $5.5 million because of refinery-strike-related project deferrals or potential losses, higher employee costs and less favorable shop-services mix.
- United States mechanical construction operating income increased $3.6 million in Q2 and $5.4 million for six months. United States building services operating income increased $4.0 million in Q2 and $4.7 million for six months.
- United Kingdom building services operating income declined to $2.8 million in Q2 from $6.2 million and to $5.2 million for six months from $9.6 million. The prior-year period included $4.8 million of favorable income from reducing estimated contract costs, and 2015 results were also affected by unfavorable foreign-exchange movements.
- SG&A increased to $161.4 million in Q2 and $323.0 million for six months, driven principally by higher salaries, incentive compensation, employee benefits, software and computer costs. The six-month SG&A margin rose to 10.0% from 9.4%.
- The company acquired a mechanical construction services business on June 1, 2015 for an immaterial amount. It contributed approximately $0.3 million of revenue and incurred an operating loss of approximately $0.2 million in the first half.
- A favorable settlement of a claim against a former owner contributed approximately $2.7 million, net of legal costs, to six-month United States building services operating income. The 2014 mechanical construction results also benefited from a $3.0 million acquisition-related settlement.
Outlook, risks, contingencies and unusual items
- Management stated that current cash, available revolving-credit capacity and expected operating cash flow should be sufficient for foreseeable liquidity and capital-expenditure needs. No formal earnings guidance was provided in the filing.
- Management expects quarterly dividends of $0.08 per share to continue for the foreseeable future, subject to credit-agreement limitations and operating conditions.
- Key operating risks include demand for non-residential construction and industrial services, economic conditions, customer collections, project execution, fixed-price contract cost overruns, commodity and fuel prices, labor disruptions and foreign-exchange movements.
- Surety bonds are important to the construction business. Estimated exposure under bonded contracts was approximately $1.1 billion at June 30, 2015. Reduced availability of surety capacity could materially affect bidding, liquidity and results.
- Outstanding letters of credit totaled approximately $106.2 million, including $104.4 million used as collateral for insurance obligations. The company had no revolving-credit borrowings.
- Legal matters include an explosion-related arbitration and a California janitorial-services class action. The latter was subject to a consent decree requiring aggregate payments of approximately $2.3 million plus monitoring procedures; $1.0 million had been paid to a claims administrator by June 30, 2015, pending court approval.
- Discontinued United Kingdom construction operations generated a six-month loss of $0.5 million. Remaining assets and liabilities were expected to settle in the ordinary course, with approximately $1.1 million of severance and lease-termination obligations remaining.
- Goodwill and net identifiable intangible assets totaled $834.6 million and $483.7 million, respectively. No impairment was recorded, but future impairment risk is particularly sensitive to performance in the United States industrial services segment and oil and gas markets.
Important facts for investors to verify
- Whether the first-half operating-income decline and negative operating cash flow are temporary working-capital effects or indicate sustained margin pressure.
- Industrial-services demand, refinery-strike effects, project timing and the potential impact on goodwill and intangible-asset valuations.
- Accounts-receivable collections, contract estimates, billings position and exposure to fixed-price construction claims or cost overruns.
- Availability and terms of surety bonds, letters of credit and the $750 million revolving credit facility.
- Status and ultimate cost of the explosion-related arbitration and California settlement approval.
- Execution of the United Kingdom withdrawal and the timing of remaining discontinued-operation obligations.
- Future capital allocation among debt repayment, dividends, share repurchases and acquisitions.