EMCOR Group, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual Form 10-K; fourth-quarter information is included in the annual results and quarterly data. EMCOR provides electrical and mechanical construction, building services, and industrial services through approximately 75 operating subsidiaries and joint ventures. It employed approximately 32,000 people, with 96% of revenue generated in the United States and 4% primarily in the United Kingdom.
Financial performance and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $7.687 billion | $7.552 billion | 1.8% increase |
| Gross profit | $1.147 billion | $1.038 billion | 10.5% increase |
| Gross margin | 14.9% | 13.7% | Up 1.2 percentage points |
| Operating income | $330.6 million | $308.5 million | 7.2% increase |
| Operating margin | 4.3% | 4.1% | Up 0.2 percentage points |
| Income from continuing operations | $228.1 million | $185.3 million | 23.1% increase |
| Net income attributable to EMCOR | $227.2 million | $181.9 million | 24.9% increase |
| Diluted EPS from continuing operations | $3.83 | $3.02 | 26.8% increase |
| Cash flow from operating activities | $366.1 million | $264.6 million | 38.4% increase |
Segment mix: U.S. electrical construction generated $1.830 billion of revenue and $150.0 million of operating income; U.S. mechanical construction generated $2.964 billion and $212.3 million; U.S. building services generated $1.754 billion and $81.5 million; U.S. industrial services generated $799.2 million and $19.1 million; and U.K. building services generated $340.7 million and $14.8 million.
Liquidity and balance sheet: Cash and cash equivalents were $467.4 million at year-end, compared with $464.6 million in 2016. Total debt was $310.2 million, consisting primarily of $284.8 million under the term loan and $25.0 million under the revolving credit facility. The company had a $900.0 million revolving facility and was in compliance with its debt covenants. Total equity was $1.674 billion and total assets were $3.966 billion.
Capital allocation: EMCOR repurchased approximately 1.4 million shares for $90.8 million during 2017 and had approximately $174.8 million of remaining repurchase authorization at year-end. The regular quarterly dividend was $0.08 per share, or $0.32 annually.
Material changes versus the prior comparable period
- Revenue growth was modest because acquisition-related revenue of approximately $192.4 million and stronger domestic construction activity largely offset declines in U.S. industrial services and U.S. building services.
- U.S. electrical construction revenue increased 7.3%, while U.S. mechanical construction revenue increased 12.1%, aided by commercial, institutional, healthcare, hospitality, telecommunications, and transportation work.
- U.S. building services revenue declined 3.1%, primarily because of lost or rebid contracts, reduced energy-services project activity, and lower snow-removal activity.
- U.S. industrial services revenue declined 25.1% and operating income declined from $77.8 million to $19.1 million. Causes included reduced refinery turnaround activity, Hurricane Harvey-related project deferrals, lower demand for new heat exchangers, lower billing rates, and increased competition.
- Gross profit benefited from improved performance across most segments and an $18.1 million recovery of previously disputed contract costs. The 2016 comparison was burdened by $47.3 million of losses on three construction projects.
- Operating income included a $57.8 million non-cash impairment charge, primarily a $57.5 million goodwill impairment in U.S. industrial services. The 2016 impairment charge was $2.4 million.
- The effective tax rate fell to 28.5% from 37.5%, principally because the Tax Cuts and Jobs Act reduced the value of deferred tax liabilities, producing an estimated $39.3 million tax benefit. The estimate remained subject to finalization.
- Backlog declined to $3.790 billion from $3.903 billion. Management estimated that approximately 85% of year-end 2017 backlog would be recognized as revenue during 2018.
- EMCOR acquired three companies in 2017 for total consideration of approximately $109.3 million, adding fire protection, millwright, and mobile mechanical services.
Outlook, risks, contingencies, and unusual items
- Management stated that cash balances, operating cash flow, and available borrowing capacity should be sufficient for foreseeable liquidity needs and capital expenditures. No formal revenue or earnings guidance is provided in the filing.
- The company expects to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method and does not anticipate a material impact on consolidated results, although certain industrial-services contracts may recognize revenue earlier.
- Backlog is an industry measure rather than a GAAP measure, and contracts may be canceled, suspended, rebid, or changed. The company expects reported backlog for services contracts to decline under the new GAAP performance-obligation disclosure framework.
- Fixed-price construction contracts and percentage-of-completion accounting expose results to cost overruns, project delays, disputed change orders, claims, and revisions to estimated margins.
- Surety bonds are material to the business. Estimated exposure under bonded projects, assuming defaults on all covered contractual obligations, was approximately $927.3 million, or about 24% of backlog. Letters of credit outstanding were approximately $110.1 million.
- EMCOR participates in approximately 200 multiemployer pension plans. It contributed $179.2 million to such pension plans in 2017 but could not determine the amount or timing of potential future withdrawal liabilities.
- Other risks include economic and credit-market weakness, government spending reductions, commodity and fuel-price inflation, labor shortages, union actions, weather events, customer concentration, cybersecurity incidents, environmental liabilities, litigation, self-insured claims, foreign-exchange movements, and future goodwill impairment.
- The U.K. defined-benefit pension plan was underfunded by $36.7 million at year-end, and the company expected to contribute approximately $4.8 million in 2018.
- Legal proceedings, government audits, and investigations were not expected by management to have a material adverse effect, but litigation outcomes are inherently uncertain and some potential claims were not estimable.
Most important facts for an investor to verify
- Whether weakness in U.S. industrial services persists and leads to additional goodwill or intangible-asset impairments.
- Whether the $3.79 billion backlog converts to revenue and cash flow as expected, particularly given cancellation and suspension provisions.
- Whether construction-project margins remain improved after the 2016 project losses and the one-time $18.1 million contract-cost recovery.
- The final tax effects of the Tax Cuts and Jobs Act and the sustainability of the lower effective tax rate.
- Working-capital trends, including accounts receivable, allowances for doubtful accounts, retainage, and net over-billings of $401.5 million.
- Available revolver capacity after letters of credit, surety requirements, acquisitions, repurchases, dividends, and mandatory term-loan repayments.
- Potential liabilities from multiemployer pension plans, self-insurance, litigation, government contracts, and environmental matters.
- The effect of the January 1, 2018 revenue-recognition adoption and the subsequent change from the company’s current backlog measure to GAAP performance-obligation disclosures.