EMCOR Group, Inc. 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual Form 10-K, not a quarterly filing; fourth-quarter results are included in the annual and selected quarterly data.
Business context
EMCOR provides electrical and mechanical construction, maintenance, facilities management, industrial services, and government services through approximately 70 subsidiaries and joint ventures in the United States and United Kingdom. The company employed more than 25,000 people at year-end, with approximately 61% represented by unions. About 91% of 2011 revenue came from the United States and 9% from the United Kingdom.
- 2011 revenue mix: approximately 36% new construction, 20% renovation and retrofit, and 44% facilities services.
- Year-end backlog was approximately $3.3 billion, compared with $3.1 billion at December 31, 2010, excluding the divested Canadian operations.
Key financial metrics
| Metric | 2011 | 2010 | Change or comment |
|---|---|---|---|
| Revenue | $5.613 billion | $4.852 billion | Up 15.7% |
| Gross profit | $733.9 million | $693.5 million | Up $40.4 million |
| Gross margin | 13.1% | 14.3% | Down 120 basis points |
| Operating income | $210.8 million | $(26.5) million | 2010 included $246.1 million of impairment charges |
| Operating margin | 3.8% | (0.5)% | Improved year over year |
| Net income attributable to EMCOR | $130.8 million | $(86.7) million | Returned to profitability |
| Diluted EPS from continuing operations | $1.78 | $(1.30) | Improved materially |
| Net cash from operating activities | $149.4 million | $69.5 million | More than doubled |
| Cash and cash equivalents | $511.3 million | $710.8 million | Down $199.5 million |
| Revolving credit borrowings | $150.0 million | $150.0 million | Facility refinanced in November 2011 |
| Total equity | $1.245 billion | $1.163 billion | Up $82.3 million |
Fourth-quarter information
- Fourth-quarter revenue was $1.518 billion, compared with $1.301 billion in the fourth quarter of 2010.
- Fourth-quarter gross profit was $214.3 million, compared with $201.5 million in the prior-year quarter.
- Fourth-quarter net income attributable to EMCOR was $36.7 million, compared with $40.0 million in the fourth quarter of 2010.
- Fourth-quarter 2011 included a $3.8 million non-cash impairment charge on identifiable intangible assets.
- Diluted fourth-quarter EPS from continuing operations was $0.53, compared with $0.61 in the fourth quarter of 2010.
Material changes versus the prior comparable period
- Revenue growth was driven by acquisitions, higher demand in United States industrial, mobile mechanical, and government services, and increased United Kingdom revenue, including a favorable foreign-exchange effect.
- Three companies were acquired in 2011. The largest was USM Services Holdings, acquired in June for approximately $251.1 million and funded with cash on hand. Acquisitions contributed approximately $407.1 million of 2011 revenue when including companies acquired in 2011 and 2010.
- Operating performance improved substantially versus 2010 because the prior year included a $246.1 million impairment charge. However, gross margin declined because of competitive pricing, lower-margin construction work, project write-downs, and weaker United Kingdom construction results.
- United States electrical segment operating income increased to $84.6 million from $70.4 million. Mechanical segment operating income declined to $117.0 million from $131.3 million, while United States facilities services operating income increased to $68.1 million from $60.0 million. United Kingdom operating income declined to $9.2 million from $15.7 million.
- Operating cash flow increased by $79.9 million, but investing cash use increased sharply to $320.5 million, primarily because of acquisitions, higher capital expenditures, and short-term investments.
- EMCOR sold its Canadian subsidiary in August 2011 for approximately $17.3 million plus repayment of approximately $26.4 million of subsidiary indebtedness. The transaction generated $9.1 million of after-tax gain and is reported as discontinued operations.
- The company began paying a quarterly dividend of $0.05 per share and repurchased approximately 1.2 million shares for $27.5 million during 2011.
Liquidity, debt, and commitments
- In November 2011, EMCOR replaced its prior facility with a secured $750 million revolving credit facility expiring in November 2016, with potential expansion to $900 million. Borrowings at year-end were $150 million and the stated interest rate was 1.80%.
- Approximately $83.1 million of letters of credit were outstanding, including approximately $82.9 million used as collateral for insurance obligations.
- Total contractual obligations were approximately $1.501 billion, including $845.2 million of open purchase obligations, $212.9 million of operating leases, and $266.5 million of other long-term obligations.
- Surety-bond exposure, assuming defaults on all covered contractual obligations at year-end, was estimated at approximately $1.2 billion.
- The company stated that cash balances, operating cash flow, and available borrowing capacity should be sufficient for foreseeable liquidity and capital needs, but noted that macroeconomic conditions could adversely affect liquidity.
Outlook, commentary, risks, and unusual items
Management described the market as highly competitive, with bidders accepting extremely low margins, but stated that EMCOR continued to replace backlog with profitable work. The filing does not provide formal numerical earnings or revenue guidance.
- Key risks include economic and credit-market weakness, delayed or canceled customer projects, government budget pressure, fixed-price contract cost overruns, commodity and fuel inflation, labor shortages, weather, customer collections, and foreign-exchange volatility.
- Approximately 61% of employees were covered by more than 400 collective bargaining agreements. EMCOR participates in more than 175 multiemployer pension plans and stated that potential withdrawal liabilities cannot be reliably estimated and could be material.
- The United Kingdom defined-benefit pension plan was underfunded by approximately $61.0 million at year-end, versus $36.9 million in 2010. Expected 2012 contributions were approximately $5.4 million.
- A $3.8 million non-cash impairment charge was recorded in 2011 for customer relationships and trade names. No goodwill impairment was recorded in 2011, but future impairment remains possible if forecasts, margins, growth rates, or interest rates deteriorate.
- The company is substantially self-insured for certain liabilities, including workers’ compensation, automobile, general liability, and employee health claims. Insurance accruals may require adjustment if claims experience worsens.
- Legal proceedings were described as arising in the ordinary course, with claims ranging from a few thousand dollars to more than $10 million; management did not believe the matters would materially affect financial position, results, or liquidity.
- The United Kingdom pension plan, foreign currency translation, percentage-of-completion accounting, claims and unapproved change orders, receivable collectibility, insurance liabilities, taxes, and goodwill valuations involve significant estimates.
Important facts for investors to verify
- Whether backlog growth excluding the 2011 acquisitions translates into sustainable organic revenue and margin growth.
- Progress in integrating USM and the other acquisitions, including expected synergies and amortization effects.
- Whether gross-margin pressure, project write-downs, and United Kingdom construction losses persist.
- Cash conversion after acquisition spending, share repurchases, dividends, and capital expenditures.
- Compliance with revolving-credit covenants and the availability of unused borrowing and surety capacity.
- Developments in multiemployer pension funding, potential withdrawal liabilities, and the underfunded United Kingdom pension plan.
- Future goodwill and intangible-asset impairment exposure, particularly in United States facilities services.
- Collection of receivables, claims, and unapproved change orders, including $14.5 million of unapproved change orders and $1.6 million of claims included in costs and estimated earnings in excess of billings at year-end.