EMCOR Group, Inc. — Q2 2012 Form 10-Q Summary
Business Context and Reporting Period
EMCOR provides electrical and mechanical construction and facilities services through approximately 70 operating subsidiaries and joint ventures in the United States and United Kingdom. The filing covers the three and six months ended June 30, 2012. The financial statements are unaudited. Prior-period results reflect the Canadian construction business as discontinued operations following its August 2011 sale, and certain segment amounts were reclassified to reflect changes in internal reporting.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Prior Year | Six Months Ended June 30, 2012 | Prior Year |
|---|---|---|---|---|
| Revenue | $1,590.0 million | $1,348.0 million | $3,128.6 million | $2,613.3 million |
| Gross profit | $194.0 million | $174.7 million | $374.7 million | $331.4 million |
| Gross margin | 12.2% | 13.0% | 12.0% | 12.7% |
| Operating income | $56.3 million | $50.0 million | $102.5 million | $91.9 million |
| Operating margin | 3.5% | 3.7% | 3.3% | 3.5% |
| Net income attributable to EMCOR | $33.4 million | $28.8 million | $60.6 million | $53.4 million |
| Diluted EPS from continuing operations | $0.49 | $0.43 | $0.89 | $0.77 |
| Operating cash flow | Not separately provided | Not separately provided | $(11.6) million | $6.3 million |
Second-quarter revenue increased 18.0%, while six-month revenue increased approximately 19.7%. Second-quarter operating income increased approximately 12.5%, and six-month operating income increased approximately 11.5%. Net income attributable to EMCOR increased approximately 16.1% for the quarter and 13.5% year to date.
Cash and cash equivalents were $434.3 million at June 30, 2012, compared with $511.3 million at December 31, 2011. Total assets were $3.0 billion and total equity was $1.3 billion. Accounts receivable were $1.2 billion, including a $16.0 million allowance for doubtful accounts.
Debt consisted primarily of $150.0 million drawn under the $750.0 million revolving credit facility, plus $5.9 million of capitalized lease obligations and other debt. The facility expires in November 2016, permits an increase to $900.0 million subject to conditions, and had approximately $93.0 million of outstanding letters of credit. The borrowing rate was 1.76% at June 30, 2012.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher activity in most segments and contributions from acquired businesses. Acquired companies contributed $115.8 million of second-quarter revenue and $248.3 million of six-month revenue.
- U.S. mechanical construction and facilities services revenue increased to $602.1 million in the quarter from $472.1 million, while U.S. facilities services revenue increased to $552.3 million from $448.5 million.
- U.S. electrical construction and facilities services revenue declined to $295.8 million from $306.5 million in the quarter, primarily due to lower hospitality, healthcare, commercial, water and wastewater, and quick-turn project activity.
- Gross and operating margins declined despite higher profits. Management attributed pressure to lower margins in the U.S. mechanical, U.K., and U.S. facilities services businesses, including weaker snow-removal results following an unusually warm winter.
- Operating cash flow shifted to a use of $11.6 million from $6.3 million provided in the prior-year period, primarily because of working-capital changes, lower accounts payable and accruals, and payment of 2011 incentive compensation.
- Investing cash use fell to $39.0 million from $312.2 million, largely because prior-year acquisition spending was substantially higher. First-half 2012 acquisition spending was $20.6 million.
- Financing cash use increased to $27.2 million, reflecting $21.2 million of common-stock repurchases and $6.7 million of dividends paid.
- Backlog was $3.28 billion at June 30, 2012, down from $3.33 billion at December 31, 2011 and $3.54 billion at June 30, 2011, excluding the sold Canadian subsidiary.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that it remains selective in bidding in a competitive market and accepts work it believes can be performed at reasonable margins. Management believes cash balances, operating cash generation, available revolver capacity, and other financing sources will be sufficient for foreseeable liquidity needs and capital expenditures.
- Primary revenue exposure is demand for non-residential construction, which is affected by macroeconomic conditions, interest rates, and government policy.
- Construction contracts and facilities-services arrangements require significant working capital. Net over-billings declined to $260.8 million from $326.9 million at year-end 2011.
- Surety bonds are important to obtaining construction contracts. Aggregate estimated exposure under bonded contracts was approximately $1.0 billion, assuming defaults on all existing obligations. Reduced surety capacity could materially affect operations and cash flow.
- Fixed-price contracts expose the company to increases in material, copper, steel, fuel, and other commodity costs that may not be recoverable from customers.
- The U.S. facilities services segment underperformed expectations, and management identified increased goodwill impairment risk if actual or forecast results deteriorate. No goodwill or other identifiable intangible impairment was recorded through June 30, 2012.
- The company disclosed a potential asbestos issue involving certain gaskets supplied by a Canadian manufacturer. No reasonable estimate of ultimate liability was available, and management did not expect a material adverse effect based on current information.
- The company is subject to lawsuits and other proceedings involving claimed amounts ranging from a few thousand dollars to more than $10 million; management did not expect these matters to be materially adverse.
- The company had $1.52 billion of contractual obligations, including $861.3 million of open purchase obligations, $208.0 million of operating leases, and $93.0 million of letters of credit. Open purchase obligations are generally expected to be recovered through customer billings.
- A quarterly dividend of $0.05 per share was declared, and approximately $51.3 million remained available under the $100 million share-repurchase authorization at June 30, 2012.
Facts Investors Should Verify
- Whether backlog continues to decline and whether reduced backlog converts into revenue and cash flow at targeted margins.
- The sustainability of margin performance, particularly in U.S. facilities services and U.S. mechanical construction.
- Working-capital trends, including receivables, contract assets and liabilities, over-billings, and operating cash flow.
- Compliance with revolving-credit covenants and the availability of borrowing capacity after letters of credit and other commitments.
- Future goodwill and intangible-asset impairment testing, especially for the U.S. facilities services segment.
- Exposure to surety-bond capacity, fixed-price contract losses, commodity and fuel costs, customer credit risk, litigation, asbestos-related claims, and uncertain tax positions.