EMCOR Group, Inc. quarterly report, Q2 FY2010

EMCOR Group, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2010. The condensed consolidated financial statements are unaudited. EMCOR provides electrical and mechanical construction and facilities services through approximately 75 operating subsidiaries and joint ventures in the United States, Canada and the United Kingdom. The company sold its Middle East venture on June 7, 2010.

Financial Performance and Position

Metric	Q2 2010	Q2 2009	Six months 2010	Six months 2009
Revenue	$1,275.6 million	$1,422.7 million	$2,487.9 million	$2,817.3 million
Gross profit	$176.4 million	$214.9 million	$341.5 million	$408.0 million
Gross margin	13.8%	15.1%	13.7%	14.5%
Operating income	$34.9 million	$74.9 million	$77.3 million	$139.2 million
Operating margin	2.7%	5.3%	3.1%	4.9%
Net income attributable to EMCOR	$27.1 million	$44.8 million	$49.0 million	$81.6 million
Diluted EPS	$0.40	$0.67	$0.72	$1.22

Q2 revenue declined 10.3%; six-month revenue declined 11.7%.
SG&A decreased to $120.7 million in Q2 and $243.5 million for the six months, primarily from prior staff reductions and lower doubtful-account provisions.
Q2 income before taxes was $40.5 million, including a $7.9 million pretax gain on the sale of the Middle East equity investment. The six-month amount was $80.4 million.
Actual effective tax rates were 30.5% in Q2 and 37.5% for the six months, compared with 39.1% and 40.5%, respectively, in the prior-year periods.
Cash and cash equivalents were $599.9 million at June 30, 2010, down from $727.0 million at December 31, 2009.
Operating cash flow was negative $80.3 million for the first six months, versus positive $138.3 million in the prior-year period. Investing cash flow was positive $6.6 million; financing cash flow was negative $44.3 million.
Total assets were $2.816 billion and total equity was $1.288 billion at June 30, 2010.

Debt, Liquidity and Commitments

Total debt and capital lease obligations were $150.4 million at June 30, 2010, including $150.0 million drawn under the new revolving credit facility. The prior $194.8 million term loan was prepaid on February 4, 2010 using new revolver borrowings and cash.
The amended $550.0 million revolving credit facility expires in February 2013 and may be increased to $650.0 million subject to lender availability. The facility is secured by substantially all company assets and contains financial and operational covenants.
The revolver interest rate was 3.10% at June 30, 2010. Management estimated that a 50-basis-point increase in rates would raise next-twelve-month after-tax interest expense by approximately $0.5 million.
Letters of credit outstanding totaled approximately $76.9 million, including approximately $76.2 million supporting insurance obligations.
Contractual obligations totaled approximately $1.236 billion, including $645.3 million of open purchase obligations, $192.4 million of operating leases and $225.4 million of other long-term obligations.
Management stated that cash balances, available borrowing capacity and expected operating cash flow should be sufficient for short-term and foreseeable long-term liquidity needs, although operating cash flow was negative during the period.

Material Changes Versus Prior Comparable Period

Revenue and profitability weakened across most operations because of reduced demand in private nonresidential construction, industrial, hospitality and commercial markets.
United States electrical construction revenue declined $43.2 million in Q2 and $99.6 million for the six months; operating income declined $14.5 million and $31.3 million, respectively.
United States mechanical construction revenue declined $91.0 million in Q2 and $183.5 million for the six months. Operating income declined $4.7 million in Q2 and $3.4 million for the six months.
United States facilities services revenue declined to $375.5 million in Q2 and $722.3 million for the six months, primarily because of weaker industrial refinery and petrochemical services and fewer discretionary mobile mechanical projects.
Canada revenue increased, primarily because of favorable currency translation, while United Kingdom operating income improved due in part to a contract termination-related gross profit contribution and lower SG&A.
Backlog was $3.15 billion at June 30, 2010, unchanged from December 31, 2009 but down from $3.40 billion at June 30, 2009. Lower awards affected commercial, hospitality, transportation, industrial, water/wastewater and institutional construction markets, partly offset by healthcare awards.
Operating results included a $19.9 million non-cash impairment charge on trade names associated with prior acquisitions. The charge primarily reflected lower forecast revenue and margins in industrial services.
The company recorded $0.8 million of restructuring expense in Q2 and the six-month period, compared with $3.0 million and $4.1 million, respectively, in the prior year.

Outlook, Commentary, Risks and Unusual Items

Management cited continued uncertainty in the economy, private nonresidential construction and refinery markets. It continued to accept work selectively based on expected margins.
Demand for domestic refined oil products reduced industrial-services activity and contributed to the trade-name impairment. Management warned that weaker future revenues or margins could produce additional goodwill or intangible-asset impairment charges.
The United States facilities services reporting unit exceeded carrying value by approximately $38.0 million in the second-quarter interim impairment test. The filing states that future performance and backlog activity will be important to impairment assessments.
A United Kingdom defined-benefit pension plan was curtailed on May 31, 2010. The company recognized a $6.4 million curtailment gain to be amortized through future pension cost and made a one-time $25.9 million contribution; it expected to contribute an additional $2.5 million during the remainder of 2010.
Construction contracts are accounted for primarily using percentage-of-completion estimates. Changes in estimated costs, claims, change orders, collectibility or project losses may materially affect reported results.
Aggregate estimated exposure under performance and payment surety bonds was approximately $1.1 billion, assuming defaults on all covered contractual obligations. Reduced availability or more restrictive terms for surety bonds could limit bidding and adversely affect results or liquidity.
The company was involved in lawsuits and other proceedings seeking amounts ranging from a few thousand dollars to more than $57.0 million; the filing states that adverse judgments could materially affect financial position, results or cash flow.
Other risks include customer credit and unbilled contract balances, commodity and fuel costs, foreign exchange movements, variable-rate debt, covenant compliance and refinancing of the revolver at its February 2013 maturity.
No material effect resulted from adoption of the variable-interest-entity consolidation guidance. The filing had not determined the potential effect of updated multiple-deliverable revenue guidance.

Investor Verification Points

Verify whether backlog converts into revenue and cash flow at targeted margins, particularly in United States electrical, mechanical and industrial facilities services.
Monitor operating cash flow, working-capital movements, net over-billings and the effect of incentive compensation and pension contributions.
Reconcile the $150.0 million revolver balance, $76.9 million of letters of credit, facility covenants and available unused capacity.
Assess sensitivity of goodwill and trade names to lower industrial-services revenue, margins and valuation assumptions.
Review exposure to surety-bond availability, pending litigation, contract claims, customer collectibility and construction-project estimates.
Separate recurring operating performance from the $7.9 million Middle East sale gain, the $4.5 million gain included in cost of sales from an energy-services venture sale, and the $19.9 million non-cash impairment charge.