EMCOR Group, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
EMCOR is a provider of electrical and mechanical construction, building services, and industrial services, operating primarily in the United States with building-services operations in the United Kingdom. The filing covers the fiscal year ended December 31, 2019; it is not a quarterly filing, although fourth-quarter information is disclosed. The company had approximately 36,000 employees and generated approximately 95% of revenue in the United States.
- Revenue mix: approximately 60% construction, 28% building services, and 12% industrial services.
- Remaining performance obligations were $4.04 billion at year-end, up from $3.96 billion, with approximately 84% expected to be recognized as revenue during 2020.
- EMCOR completed the $220.0 million acquisition of Batchelor & Kimball, Inc. and six smaller acquisitions during 2019.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $9.175 billion | $8.131 billion | 12.8% increase |
| Gross profit | $1.356 billion | $1.205 billion | 12.5% increase |
| Gross margin | 14.8% | 14.8% | Flat |
| Operating income | $460.9 million | $403.1 million | 14.3% increase |
| Operating margin | 5.0% | 5.0% | Flat |
| Net income attributable to EMCOR | $325.1 million | $283.5 million | 14.7% increase |
| Diluted EPS from continuing operations | $5.75 | $4.89 | 17.6% increase |
| Cash flow from operations | $355.7 million | $271.0 million | 31.2% increase |
Fourth-quarter 2019 revenue was $2.404 billion, gross profit was $364.7 million, net income attributable to EMCOR was $86.9 million, and diluted EPS from continuing operations was $1.54. The filing does not provide a clear fourth-quarter operating margin.
- Cash, cash equivalents, and restricted cash were $359.9 million at December 31, 2019, compared with $366.2 million at year-end 2018.
- Net cash used in investing activities was $345.3 million, primarily reflecting $301.0 million of acquisition payments and $48.4 million of capital expenditures.
- Total debt was $312.2 million, including $50.0 million drawn on the revolving facility, $254.4 million under the term loan, and $9.7 million of finance lease liabilities.
- The company had a $900.0 million revolving credit facility, approximately $109.0 million of outstanding letters of credit, and was in compliance with its debt covenants.
- Accounts receivable increased to $2.031 billion from $1.774 billion; contract liabilities increased to $623.6 million from $552.3 million.
- The company paid a quarterly dividend of $0.08 per share, or $0.32 per share for the year. No shares were repurchased in 2019; approximately $158.5 million remained authorized for future repurchases.
Material changes versus the prior comparable period
- All reportable segments increased revenue and operating income. United States electrical construction revenue increased 13.4%, mechanical construction 12.7%, building services 12.3%, industrial services 17.8%, and United Kingdom building services 2.0%.
- United States mechanical construction operating margin declined to 6.7% from 7.4%, primarily because several large food-processing projects were in earlier stages and had lower recognized margins; prior-year results benefited from successful project close-outs.
- United States industrial services operating margin improved to 4.1% from 3.0%, helped by more normalized refinery turnaround demand following the effects of Hurricane Harvey in 2018.
- United States building services operating margin increased to 5.4% from 5.0%, while electrical construction margin increased to 7.3% from 7.1%.
- SG&A increased to $893.5 million from $799.2 million, but declined as a percentage of revenue to 9.7% from 9.8%.
- No goodwill or identifiable-intangible impairment was recorded in 2019, compared with a $0.9 million intangible-asset impairment charge in 2018 and $57.8 million of impairment charges in 2017.
- Operating cash flow improved by $84.7 million, while investing cash use increased substantially because of acquisitions. Financing cash use declined primarily because 2019 included no share repurchases, compared with $216.2 million in 2018.
- Adoption of the new lease accounting standard added operating lease right-of-use assets of $245.5 million and operating lease liabilities of $258.1 million at year-end, without a material reported effect on liquidity, earnings, or debt covenants.
Outlook, risks, contingencies, and unusual items
The filing does not provide formal numerical revenue or earnings guidance. Management states that cash, operating cash flow, and available borrowing capacity are expected to be sufficient for foreseeable liquidity needs and capital expenditures. Future performance depends significantly on non-residential construction, facilities outsourcing, industrial maintenance demand, customer funding, and the company’s ability to execute projects profitably.
- On February 15, 2020, after year-end, EMCOR identified an infiltration and encryption of portions of its information-technology network. The attack disrupted operations, restoration was ongoing as of the filing date, and the company could not estimate the total costs, timing, or extent of insurance recovery.
- Revenue recognition relies substantially on cost-to-cost estimates for long-term construction contracts. Changes in estimated costs, project scope, pending change orders, claims, or customer collectibility could materially affect reported results.
- Fixed-price contracts expose the company to labor, material, fuel, productivity, schedule, and project-execution risk. Copper, steel, and gasoline price increases may not be fully recoverable.
- Approximately 59% of employees were covered by collective bargaining agreements. EMCOR participates in approximately 200 multiemployer pension plans and states that potential withdrawal liabilities could be material, although no withdrawal liability was recorded.
- Surety-bond exposure was approximately $1.2 billion, or about 30% of remaining performance obligations, assuming defaults on all covered contractual obligations. The company reported no known significant surety losses.
- The United States industrial services reporting unit had the narrowest goodwill impairment cushion. Management stated that adverse operating results, lower growth or margins, or higher discount rates could increase future impairment risk.
- Legal proceedings, government audits, environmental obligations, self-insured claims, labor shortages, government spending changes, weather, economic cycles, foreign exchange, and customer cancellations remain material risk factors.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. BKI was excluded from management’s internal-control assessment because it had not yet been fully integrated.
Most important facts for investors to verify
- Whether the February 2020 cyberattack caused material revenue delays, incremental costs, insurance recoveries, or control deficiencies in subsequent filings.
- Whether the lower-margin mechanical construction projects improve as milestones are achieved and whether project estimates require material revisions.
- Acquisition performance and integration, particularly the BKI purchase price allocation, intangible-asset amortization, and contribution to margins and cash flow.
- Cash conversion, accounts receivable growth, retainage collections, contract assets, and the sustainability of positive operating cash flow.
- Debt repayment and refinancing requirements before the August 2021 maturity of the revolving facility and term loan.
- Exposure to multiemployer pension underfunding, surety-bond requirements, self-insured liabilities, litigation, and government contract audits.
- Potential goodwill or intangible-asset impairment in the United States industrial services segment under weaker oil-and-gas demand or higher interest rates.