EMCOR Group, Inc. 2013 Form 10-K Summary
Business Context and Reporting Period
EMCOR Group, Inc. provides electrical and mechanical construction, building services, and industrial services, primarily in the United States. The filing covers the fiscal year ended December 31, 2013; the source does not represent a standalone fourth-quarter filing. The company operated through approximately 70 subsidiaries and joint ventures, employed more than 27,000 people, and generated approximately 93% of revenue in the United States and 7% primarily in the United Kingdom.
Reportable segments were United States electrical construction and facilities services, United States mechanical construction and facilities services, United States building services, United States industrial services, and United Kingdom construction and building services. In July 2013, EMCOR acquired RepconStrickland, Inc. (RSI), expanding its refinery and petrochemical turnaround and specialty-services business.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $6.417 billion | $6.347 billion | 1.1% increase |
| Gross profit | $813.1 million | $806.4 million | 0.8% increase |
| Gross margin | 12.7% | 12.7% | Flat |
| Operating income | $210.3 million | $250.0 million | 15.9% decrease |
| Operating margin | 3.3% | 3.9% | Down 0.6 percentage points |
| Income from continuing operations | $127.4 million | $148.9 million | 14.5% decrease |
| Net income attributable to EMCOR | $123.8 million | $146.6 million | 15.5% decrease |
| Diluted EPS from continuing operations | $1.82 | $2.16 | Decrease |
| Cash flow from operations | $150.1 million | $184.4 million | Decrease |
Year-end cash and cash equivalents were $439.8 million, compared with $605.3 million in 2012. Accounts receivable were $1.268 billion, including an $11.9 million allowance for doubtful accounts. Net over-billings were $290.6 million, broadly unchanged from 2012.
At December 31, 2013, the company had $350.0 million outstanding under a new term loan and no borrowings under its $750.0 million revolving credit facility. The new $1.1 billion credit agreement expires November 25, 2018, bears variable interest rates, and had an effective rate of 1.42% at year-end. Letters of credit outstanding were approximately $83.3 million.
Total assets were $3.466 billion and total equity was $1.480 billion. Goodwill increased to $834.8 million from $566.6 million, and net identifiable intangible assets increased to $541.5 million from $343.7 million, principally because of acquisitions. No goodwill or identifiable intangible impairment was recorded in 2013.
Backlog was $3.361 billion at December 31, 2013, compared with $3.374 billion at year-end 2012. Management estimated that approximately 84% of 2013 year-end backlog would be recognized as revenue during 2014.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, primarily from $133.3 million of revenue contributed by 2013 acquisitions and higher United States electrical-construction activity.
- RSI contributed approximately $123.6 million of revenue and $3.0 million of operating income, net of $5.7 million of identifiable-intangible amortization.
- United States building-services operating income increased to $67.2 million from $43.3 million, reflecting improved project execution, better energy and mobile-mechanical results, snow-removal activity, and termination of certain unprofitable contracts.
- United States mechanical-construction operating income declined to $93.8 million from $125.3 million. Two southeastern projects generated aggregate losses of approximately $24.5 million.
- United Kingdom construction and building services moved to a $6.0 million operating loss from $7.1 million of operating income. The construction business generated a $19.0 million operating loss, and EMCOR decided to withdraw from United Kingdom construction and focus there on building services.
- Restructuring expense increased to $11.7 million from $0.1 million, principally for United Kingdom construction restructuring. EMCOR expected an additional $1.4 million of related expense in 2014.
- Selling, general and administrative expense rose to $591.1 million, or 9.2% of revenue, from $556.2 million, or 8.8%, due partly to acquisition-related costs, $5.8 million of intangible amortization, and $6.1 million of RSI transaction costs.
- Cash used in investing activities increased to $483.4 million from $42.5 million, largely because of $454.7 million spent on acquisitions, including RSI.
- The company repurchased approximately 0.7 million shares for $26.1 million during 2013 and had $122.5 million of remaining repurchase authorization at year-end. The regular quarterly dividend paid in 2013 was $0.06 per share; management announced an intended increase to $0.08 beginning in the first quarter of 2014.
Outlook, Commentary, Risks, and Unusual Items
No specific revenue, earnings, or margin guidance is provided in the filing. Management stated that it remained disciplined in accepting work it believed could be performed at reasonable margins and expected existing cash, operating cash flow, and available revolving-credit capacity to satisfy foreseeable liquidity needs.
- Demand depends on cyclical non-residential construction, facility outsourcing, government spending, refinery activity, customer capital budgets, and access to credit.
- Fixed-price contracts expose EMCOR to labor, material, fuel, subcontractor, productivity, and project-estimate risk. The company recognized approximately $24.5 million of aggregate losses on two contracts in 2013.
- Government spending constraints, contract cancellations, rebidding risk, and government audit, renegotiation, termination, or debarment risks could affect revenue and liquidity.
- EMCOR faces commodity and fuel-price exposure, particularly for copper, steel, and a fleet of more than 8,500 vehicles, and does not use derivatives to hedge these risks.
- The company participates in more than 200 multiemployer pension plans. Potential withdrawal liabilities and future contribution increases cannot be reliably estimated and could be material.
- Surety bonds are important to the construction business. Estimated exposure assuming defaults on all bonded contractual obligations was approximately $0.8 billion at year-end.
- The company is effectively self-insured for substantial claims and had estimated workers' compensation, automobile, general liability, and property insurance liabilities of approximately $142.0 million.
- USM, an EMCOR subsidiary, faces a California wage-related class-action lawsuit involving janitorial contractors. If certified and decided adversely, the matter could result in significant damages and similar claims, although management believes it has valid defenses.
- Goodwill and intangible assets are sensitive to future operating performance, discount rates, and growth assumptions. The United States industrial-services reporting unit had the narrowest disclosed valuation cushion; a 50-basis-point increase in its discount rate would cause estimated fair value to approach carrying value.
- Management and Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. However, RSI, representing 16.2% of total assets and 1.9% of 2013 revenue, was excluded from management's internal-control assessment while integration continued.
Investor Verification Points
- Verify the sustainability of improved United States building-services performance and the expected benefits from RSI.
- Monitor completion and final profitability of the two loss-making southeastern projects and the remaining United Kingdom restructuring.
- Assess cash conversion, receivables, over-billings, retainage, claims, and unapproved change orders under percentage-of-completion accounting.
- Review acquisition integration, purchase-price allocations, goodwill concentration, intangible amortization, and impairment sensitivity.
- Check compliance with credit-agreement covenants and the impact of scheduled term-loan amortization, dividends, and share repurchases on liquidity.
- Evaluate potential multiemployer pension withdrawal liabilities, surety-bond capacity, insurance claims, and the USM litigation.
- Confirm that backlog converts to revenue and profit, recognizing that contracts may be delayed, modified, suspended, or canceled.