EMCOR Group, Inc. — Fiscal 2014 Form 10-K Summary
Business context and reporting period
EMCOR provides electrical and mechanical construction, facilities and building services, and industrial services, primarily in the United States, through approximately 70 operating subsidiaries and joint ventures. The filing covers the fiscal year ended December 31, 2014, with comparative information for 2013 and 2012. Approximately 95% of 2014 revenue was generated in the United States and 5% in foreign markets, substantially in the United Kingdom.
The company ceased United Kingdom construction operations in the third quarter of 2014; those results are presented as discontinued operations. The United Kingdom business now focuses on building services. EMCOR had approximately 27,000 employees at year-end, with approximately 55% represented by unions.
Key financial metrics
| Metric | 2014 | 2013 | Change or comment |
|---|---|---|---|
| Revenue | $6.425 billion | $6.334 billion | Up 1.4% |
| Gross profit | $907.2 million | $821.6 million | Up $85.6 million |
| Gross margin | 14.1% | 13.0% | Improved 110 basis points |
| Operating income | $289.9 million | $240.4 million | Up 20.6% |
| Operating margin | 4.5% | 3.8% | Improved 70 basis points |
| Income from continuing operations | $178.1 million | $150.4 million | Up $27.7 million |
| Net income attributable to EMCOR | $168.7 million | $123.8 million | Up $44.9 million |
| Diluted EPS from continuing operations | $2.59 | $2.16 | Up $0.43 |
| Net cash from operating activities | $246.7 million | $150.1 million | Up $96.6 million |
| Cash and cash equivalents | $432.1 million | $439.8 million | Down $7.8 million |
| Term loan | $332.5 million | $350.0 million | Quarterly principal repayments reduced balance |
| Revolving credit borrowings | None | None | $750 million facility available, subject to covenants |
| Backlog | $3.634 billion | $3.344 billion | Up 8.7%; approximately 82% expected to convert to 2015 revenue |
Discontinued United Kingdom construction operations generated 2014 revenue of $19.3 million and an after-tax loss of $4.7 million, compared with revenue of $83.6 million and a $23.1 million loss in 2013.
Segment performance and material changes
- United States industrial services: Revenue increased to $840.0 million from $519.4 million, primarily reflecting the RepconStrickland acquisition and stronger field-services demand. Operating income increased to $63.2 million from $38.8 million.
- United States mechanical construction and facilities services: Revenue declined to $2.201 billion from $2.330 billion as several large manufacturing projects completed in 2013 were not replaced. Operating income improved to $114.4 million from $93.8 million, helped by better project performance and the absence of approximately $24.5 million of project losses recorded in 2013.
- United States electrical construction and facilities services: Revenue declined to $1.312 billion from $1.346 billion and operating income declined to $90.9 million from $98.1 million. Results were affected by lower institutional, manufacturing, transportation, and water and wastewater activity, as well as project losses at a subsidiary being closed.
- United States building services: Revenue declined to $1.721 billion from $1.795 billion and operating income decreased modestly to $65.9 million from $67.2 million. Declines in supplier-management, energy-services, and government-site work were partly offset by improved mobile mechanical services and government project close-outs.
- United Kingdom building services: Revenue increased to $350.4 million from $343.6 million and operating income increased to $15.0 million from $13.0 million. The segment benefited from favorable foreign exchange and increased commercial and healthcare activity.
Companies acquired in 2013 contributed $231.2 million of incremental 2014 revenue and $9.3 million of incremental operating income, net of identifiable-intangible amortization, on a comparable-period basis.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow was $246.7 million, supported by higher net income, a $30.6 million reduction in accounts receivable, and lower income tax payments.
- Investing cash outflow was $21.7 million, compared with $483.4 million in 2013, when EMCOR paid for significant acquisitions. Capital expenditures were $38.0 million.
- Financing cash outflow was $230.0 million, primarily reflecting $202.0 million of share repurchases, $17.5 million of long-term debt repayments, and $21.3 million of dividends.
- EMCOR repurchased approximately 4.8 million shares for approximately $206.0 million during 2014. Approximately $166.5 million remained available under the $250 million repurchase authorization at year-end.
- The company paid quarterly dividends of $0.08 per share in 2014 and stated that it expected to continue such dividends for the foreseeable future, subject to credit-agreement limitations.
- The 2013 Credit Agreement includes a $750 million revolving facility and a $350 million term loan maturing in 2018. The term loan carried an interest rate of 1.42% at year-end. Approximately $95.5 million of letters of credit were outstanding.
- Management believes cash, operating cash generation, available revolver capacity, and other financing sources will be sufficient for expected short- and long-term liquidity needs.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management emphasizes disciplined bidding, acceptance of work expected to generate reasonable margins, backlog growth, and reliance on operating cash flow for liquidity.
- Backlog increased to $3.63 billion, but contracts may be delayed, suspended, or canceled; many are subject to customer termination rights.
- Construction results depend on estimates under percentage-of-completion accounting. Changes in expected costs, claims, change orders, labor availability, weather, and customer credit quality can materially affect margins and cash flow.
- Fixed-price contracts expose the company to labor, material, fuel, and execution-cost inflation. Copper, steel, and gasoline prices are specifically identified risks.
- Lower crude oil prices could reduce refinery customers’ maintenance, turnaround, and heat-exchanger spending, creating risk for the industrial-services segment and its goodwill valuation.
- The company recognized an $11.7 million gain on the sale of a building, a $1.5 million non-cash trade-name impairment charge, and $1.2 million of restructuring expenses in 2014. No goodwill impairment was recorded.
- The United Kingdom defined-benefit pension plan was underfunded by $50.7 million at year-end, and the company expected to contribute approximately $5.7 million in 2015.
- EMCOR contributed $138.0 million to more than 200 U.S. multiemployer pension plans in 2014. Potential withdrawal liabilities cannot be reliably estimated and could be material.
- Surety bonds supported construction obligations with estimated aggregate exposure of approximately $1.1 billion if defaults occurred on all covered obligations.
- A California janitorial-services class action was subject to a February 2015 consent decree requiring payments of $1.0 million to class-related claimants and $1.3 million to class counsel, subject to court approval. The settlement was accrued at December 31, 2014.
- The company is self-insured for significant portions of workers’ compensation, automobile, general liability, property, and employee healthcare claims. A 10% increase in estimated insurance liabilities would have produced approximately $13.5 million of additional 2014 expense.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether backlog converts to revenue and profit at expected margins, particularly the 82% targeted for 2015.
- Execution and margin trends in the industrial-services segment following the RepconStrickland acquisition and amid volatile oil prices.
- Exposure to fixed-price project losses, unapproved change orders, claims, retainage, and customer collections.
- Compliance with term-loan covenants and the company’s capacity to fund repurchases, dividends, pension contributions, and surety or letter-of-credit requirements.
- Potential multiemployer pension withdrawal liabilities and future contribution-rate increases.
- Funding requirements for the underfunded United Kingdom pension plan and the remaining discontinued-operation obligations.
- Whether goodwill and trade-name valuations remain supportable if industrial-services forecasts, margins, interest rates, or crude-oil conditions deteriorate.