EMCOR Group, Inc. — Form 10-Q Summary
Business context and reporting period
EMCOR Group, Inc. is an electrical and mechanical construction and facilities services provider serving commercial, industrial, utility and institutional customers through approximately 70 operating subsidiaries and joint ventures in the United States and United Kingdom. This unaudited filing covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Prior-year results include Canada as a discontinued operation following its August 2011 disposition.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $1.539 billion | $1.265 billion | 21.6% increase |
| Gross profit | $180.7 million | $156.7 million | 15.3% increase |
| Gross margin | 11.7% | 12.4% | Down 70 basis points |
| Operating income | $46.2 million | $41.8 million | 10.4% increase |
| Operating margin | 3.0% | 3.3% | Down 30 basis points |
| Net income attributable to EMCOR | $27.1 million | $24.6 million | 10.4% increase |
| Diluted EPS from continuing operations | $0.40 | $0.35 | Increase |
| Cash flow from operations | $(33.1) million | $(35.1) million | Use improved by $2.0 million |
Revenue growth reflected higher activity across all segments, plus $132.5 million of revenue from companies acquired in 2012 and 2011. Segment revenue was $290.5 million for U.S. electrical construction and facilities services, $552.9 million for U.S. mechanical construction and facilities services, $554.2 million for U.S. facilities services, and $140.9 million for United Kingdom construction and facilities services.
Operating income benefited from stronger U.S. electrical and United Kingdom performance, including a favorable resolution of a healthcare construction claim. These gains were partly offset by lower operating income in U.S. mechanical construction and U.S. facilities services. SG&A increased to $134.5 million from $113.9 million, but declined to 8.7% of revenue from 9.0%. No restructuring expense was recorded in Q1 2012 versus $1.0 million in Q1 2011.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $438.7 million at March 31, 2012, down from $511.3 million at December 31, 2011.
- Net cash used in investing activities was $28.7 million, including $21.0 million for acquisitions and $7.8 million for capital expenditures.
- Net cash used in financing activities was $12.4 million, including $13.2 million for share repurchases, $3.3 million of dividends and $2.2 million for contingent consideration, partly offset by share-based compensation tax benefits and equity proceeds.
- Total debt was approximately $156.1 million, consisting primarily of $150.0 million outstanding under the revolving credit facility and $6.1 million of capital lease obligations.
- The revolving credit facility provides $750.0 million of capacity, expires in November 2016, and permits potential expansion to $900.0 million. Approximately $88.5 million of letters of credit were outstanding at March 31, 2012.
- Total current assets were $1.862 billion versus current liabilities of $1.232 billion. Net over-billings were $280.8 million, down from $326.9 million at December 31, 2011.
Material changes, outlook and risks
Backlog was $3.39 billion at March 31, 2012, compared with $3.29 billion at March 31, 2011 and $3.33 billion at December 31, 2011. The year-over-year increase was primarily attributable to $295.0 million of backlog acquired with three companies; excluding acquisitions, backlog declined year over year in domestic and United Kingdom construction, partly offset by higher U.S. facilities services backlog.
Management stated that cash balances, expected operating cash flow and available borrowing capacity should be sufficient for foreseeable liquidity needs and capital expenditures. The filing does not provide formal revenue or earnings guidance.
- Profitability remains exposed to competitive pricing, project execution, contract estimates, construction demand and macroeconomic conditions.
- Fixed-price contracts may not permit recovery of higher material, fuel or labor costs. The company is exposed to copper, steel and gasoline price increases.
- Revenue recognition relies on percentage-of-completion estimates, including estimated total costs, claims and unapproved change orders. Changes in estimates could affect future results.
- Surety bonds are important to contract awards. Estimated exposure under existing bonded projects was approximately $1.1 billion; reduced surety capacity could materially affect operations and liquidity.
- The company had lawsuits and other proceedings seeking amounts ranging from a few thousand dollars to more than $10 million, but management did not expect these matters to materially affect financial position, results or liquidity.
- Goodwill and identifiable intangible assets totaled $568.9 million and $363.3 million, respectively. No impairment was recorded in Q1 2012, but future impairment depends on operating performance, interest rates and valuation assumptions.
- Management noted weaker U.S. facilities services results from reduced snow-removal revenue, timing of client-site start-up costs and the absence of certain prior-year industrial turnaround projects.
Most important facts for investors to verify
- Whether revenue growth from acquisitions translates into sustainable organic growth and improved segment margins.
- Whether the decline in gross and operating margins reverses, particularly in U.S. mechanical construction and U.S. facilities services.
- Conversion of backlog into revenue and cash, including the quality and profitability of acquired backlog.
- Working-capital trends, contract billings, receivables collectibility and the return to positive operating cash flow.
- Compliance with revolving-credit covenants and continued availability of borrowing capacity and surety bonds.
- Potential effects of construction claims, contract-estimate revisions, litigation, tax examinations and future goodwill or intangible-asset impairment testing.