EMCOR Group, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
EMCOR Group provides electrical and mechanical construction, facilities services, building services, and industrial services through operations in the United States and United Kingdom. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $2.202 billion | $2.288 billion | $6.516 billion | $6.771 billion |
| Gross profit | $363.2 million | $336.0 million | $1.012 billion | $991.1 million |
| Gross margin | 16.5% | 14.7% | 15.5% | 14.6% |
| Operating income | $135.9 million | $115.7 million | $119.2 million | $338.0 million |
| Operating margin | 6.2% | 5.1% | 1.8% | 5.0% |
| Net income | $61.2 million | $81.8 million | $53.2 million | $238.2 million |
| Diluted EPS | $1.11 | $1.45 | $0.96 | $4.22 |
Third-quarter revenue declined 3.8%, while operating income increased 17.4% and operating margin expanded 110 basis points. Management described Q3 operating income and operating margin as company records for a third quarter. Nine-month net income and EPS were significantly reduced by a $232.8 million non-cash impairment charge recorded in Q2 2020.
- Q3 segment revenue changes: U.S. electrical construction decreased to $508.9 million; U.S. mechanical construction increased to $891.5 million; U.S. building services increased to $551.6 million; U.S. industrial services decreased to $139.7 million; and U.K. building services increased to $110.1 million.
- Q3 operating income increased in U.S. electrical construction to $47.1 million, U.S. mechanical construction to $80.0 million, U.S. building services to $38.2 million, and U.K. building services to $5.3 million. U.S. industrial services reported a $9.8 million operating loss.
- Cash provided by operations for the first nine months was $546.8 million, compared with $176.9 million in 2019. The increase reflected lower receivables, favorable billing timing, advanced billings, and approximately $67.3 million of deferred payroll-tax payments under the CARES Act.
- Cash, cash equivalents, and restricted cash totaled $680.6 million at September 30, 2020, compared with $359.9 million at December 31, 2019.
- Investing cash outflow was $77.2 million, including $44.9 million for acquisitions and $34.2 million for capital expenditures. Financing cash outflow was $147.6 million, including $99.0 million of share repurchases and $13.3 million of dividends.
- Total debt was $281.9 million at September 30, 2020, including a $277.5 million term loan. There were no direct borrowings under the revolving facility, although $78.8 million of letters of credit were outstanding.
- The amended credit agreement provides a $1.3 billion revolving facility and a $300.0 million term loan, expiring March 2, 2025. The company was in compliance with its covenants at September 30, 2020.
Material changes versus the prior comparable period
- Revenue declined because of lower U.S. industrial-services activity and lower U.S. electrical-construction revenue, primarily related to COVID-19 disruptions and reduced oil-and-gas demand. These declines were partly offset by U.S. mechanical construction, U.S. building services, and U.K. building services growth.
- Gross profit increased $27.2 million in Q3 and $20.4 million for the nine-month period, driven principally by stronger performance and mix in the U.S. construction segments.
- U.S. industrial-services revenue declined 40.4% in Q3 and 16.0% for the nine-month period. Its Q3 operating margin fell to negative 7.0% from positive 2.4%.
- SG&A increased to $226.8 million in Q3 and $659.0 million for the nine-month period, although costs excluding acquired businesses declined due to reduced discretionary spending, headcount reductions, furloughs, salary reductions, and lower benefits costs.
- The company recognized $225.5 million of goodwill impairment and $7.3 million of identifiable-intangible and other long-lived-asset impairment in Q2, primarily involving U.S. industrial services.
- Remaining performance obligations increased to $4.530 billion at September 30, 2020 from $4.036 billion at December 31, 2019 and September 30, 2019, a 12% increase from year-end.
- Two companies were acquired during the first nine months of 2020 for total consideration of $43.2 million, expanding building automation, controls, and mechanical-services capabilities.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management reported stabilization during Q3 in construction and building-services operations as restrictions eased and teams adapted to new work practices, but cautioned that the trend may not continue.
- COVID-19 caused job-site access restrictions, temporary shutdowns, lower labor efficiency, deferred maintenance projects, fewer call-out opportunities, and potential delays in completing remaining performance obligations.
- Oil-price volatility and reduced oil-and-gas capital spending materially weakened the U.S. industrial-services segment. The segment’s goodwill carrying value equaled estimated fair value after the Q2 impairment; further adverse changes could result in additional impairment.
- Accounts receivable were $1.942 billion, net of a $19.3 million credit-loss allowance, up from $14.5 million at year-end 2019. Further credit losses could result if customer collections deteriorate.
- Surety-bond exposure was approximately $1.3 billion based on project completion percentages. Reduced surety capacity could limit bidding or require alternative collateral.
- The company disclosed a February 2020 ransomware-related infiltration and encryption of portions of its information-technology network. Outside experts found no identified exfiltration of customer or employee data or inappropriate access to accounting and finance systems; insurance may not fully offset related costs.
- Legal proceedings, government audits, investigations, and claims are ongoing. Management does not currently expect a material adverse impact, but litigation outcomes are inherently uncertain.
- The company expects to pay a $6.9 million term-loan principal installment on December 31, 2020 and $13.9 million annually thereafter, with remaining principal due March 2, 2025.
- Quarterly dividends remained $0.08 per share. The company repurchased approximately 1.5 million shares for $99.0 million during the first nine months, but made no repurchases in Q2 or Q3.
Important facts for investors to verify
- Whether COVID-19 restrictions, project delays, customer cancellations, and collection risks materially affect the $4.530 billion performance-obligation backlog.
- Whether oil-and-gas demand and U.S. industrial-services margins recover, and whether additional goodwill or intangible-asset impairments occur.
- The sustainability of unusually strong operating cash flow, given its reliance on receivables reductions, advanced billings, deferred payroll taxes, and working-capital timing.
- Compliance with credit-agreement covenants and the company’s ability to fund term-loan payments, dividends, acquisitions, capital expenditures, and any resumed share repurchases.
- Changes in surety-bond availability, letters of credit, insurance liabilities, legal contingencies, and ransomware-related costs.
- The effect of the elevated effective tax rates of 54.7% for Q3 and 53.9% for the nine-month period, largely attributable to the mostly nondeductible impairment charges.