EMCOR Group, Inc. — Q2 2011 Form 10-Q Summary
Business context and reporting period
EMCOR provides electrical and mechanical construction and facilities services across the United States, Canada and the United Kingdom through more than 70 operating subsidiaries and joint ventures. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $1.400 billion, versus $1.276 billion | $2.712 billion, versus $2.488 billion |
| Gross profit / margin | $179.8 million / 12.8%, versus 13.8% | $342.8 million / 12.6%, versus 13.7% |
| Operating income / margin | $49.1 million / 3.5%, versus $34.9 million / 2.7% | $91.5 million / 3.4%, versus $77.3 million / 3.1% |
| Net income attributable to EMCOR | $28.8 million, versus $27.1 million | $53.4 million, versus $49.0 million |
| Diluted EPS | $0.42, versus $0.40 | $0.78, versus $0.72 |
| Operating cash flow | Not separately provided for the quarter | $5.0 million, versus $(74.2) million |
- Cash and cash equivalents were $406.5 million at June 30, 2011, compared with $710.8 million at December 31, 2010. The decrease principally reflected $301.8 million of acquisition payments and capital expenditures.
- Debt totaled approximately $153.4 million, including $150.0 million outstanding under the revolving credit facility. The facility has $550.0 million of commitments, expires in February 2013, and carried an interest rate of 2.94% at June 30, 2011.
- Letters of credit outstanding were approximately $93.9 million. The company reported $1.587 billion of contractual obligations and $1.3 billion of estimated exposure under surety bonds.
- Backlog was $3.80 billion at June 30, 2011, compared with $3.15 billion at June 30, 2010 and $3.42 billion at December 31, 2010.
Material changes versus the prior comparable period
- Second-quarter revenue increased 9.7%; first-half revenue increased 9.0%. Growth was driven by acquisitions, organic growth in U.S. facilities services, higher U.S. electrical and U.K. revenue, and favorable foreign exchange effects.
- U.S. facilities services revenue increased to $451.5 million in the quarter and $901.0 million in the first half, while Canada construction revenue declined to $51.9 million and $98.9 million, respectively.
- Gross margins declined because of tighter project margins, a competitive bidding environment and a greater mix of public projects. Management also reported project write-downs and lower margins in portions of facilities services and mechanical construction.
- Operating income benefited from the absence of the $19.9 million identifiable-intangible impairment charge recorded in 2010. Excluding that 2010 charge, 2011 operating income would have been lower by approximately $5.8 million for the quarter and $5.7 million for the first half.
- First-half 2011 operating cash flow improved from a use of $74.2 million to $5.0 million, principally because 2010 included a $25.9 million supplemental U.K. pension contribution and higher incentive compensation payments.
Guidance, outlook, risks and unusual items
- No specific quantitative full-year revenue or earnings guidance is provided in the filing. Management believes current cash, available borrowing capacity and expected operating cash flow will support foreseeable liquidity needs.
- On June 30, 2011, EMCOR acquired USM Services Holdings, Inc. for $255.0 million in cash. USM provides facilities maintenance services; approximately $241.7 million was preliminarily allocated to goodwill and identifiable intangible assets. The purchase-price allocation remained subject to adjustment, and approximately $4.5 million of transaction costs was expensed in the second quarter.
- On July 27, 2011, EMCOR agreed to sell its Canadian subsidiary. Closing was expected in the third quarter, with consideration of approximately CAD $16.9 million for shares and CAD $25.5 million repayment of subsidiary indebtedness. The gain or loss was not estimable at filing.
- Construction results depend on percentage-of-completion estimates, project execution, claims and change orders, customer collectibility, labor and material costs, and economic demand for non-residential construction.
- Surety-bond availability has become more limited and restrictive. A reduction in bonding capacity could adversely affect bidding ability, revenue, cash flow and financial condition.
- The revolving facility is secured by substantially all company and subsidiary assets and contains financial and operational covenants. It expires in February 2013, and renewal is not assured.
- Goodwill and net identifiable intangible assets were $570.7 million and $387.4 million, respectively. No impairment was recorded through June 30, 2011, but future impairment charges remain possible if forecasts, margins, growth assumptions or interest rates change.
- A longstanding U.K. arbitration matter involving approximately £38.5 million of claims was settled on March 31, 2011, with mutual releases. The filing also notes other proceedings seeking amounts ranging from thousands of dollars to more than $10 million.
- Management identified commodity-price, fuel-price, foreign-currency, variable-interest-rate, pension, insurance and uncertain-tax-position risks. Approximately $1.1 million of unrecognized tax benefits could be recognized within the next twelve months.
Important facts for investors to verify
- Whether USM integration, preliminary purchase-price allocations and anticipated operating synergies meet management expectations.
- Whether backlog converts to revenue and cash flow without further margin erosion, project write-downs or unfavorable contract estimates.
- The final outcome and timing of the Canadian subsidiary sale, including the resulting gain or loss and cash proceeds.
- Available capacity, covenant compliance and refinancing plans for the revolving credit facility before its February 2013 expiration.
- Future goodwill and intangible-asset impairment testing, particularly for U.S. facilities services.
- Exposure to surety-bond capacity, construction claims, customer receivable collectibility and other legal proceedings.
- Liquidity after acquisitions, capital expenditures, pension contributions and required working capital for long-duration contracts.