EMCOR Group, Inc. Form 10-K Summary
Business context and reporting period
EMCOR Group, Inc. filed its Form 10-K for the fiscal year ended December 31, 2021, filed February 24, 2022. The filing is an annual report rather than a standalone fourth-quarter filing. EMCOR is a specialty contractor providing electrical and mechanical construction and facilities services, building services, and industrial services through approximately 90 operating subsidiaries. Approximately 95% of 2021 revenue was generated in the United States and 5% in the United Kingdom.
Reportable segments are United States electrical construction and facilities services, United States mechanical construction and facilities services, United States building services, United States industrial services, and United Kingdom building services. The company employed approximately 34,000 people at year-end, with approximately 60% represented by unions.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $9.904 billion | $8.797 billion | 12.6% increase |
| Gross profit | $1.502 billion | $1.395 billion | 7.6% increase |
| Gross margin | 15.2% | 15.9% | 70 basis-point decrease |
| Operating income | $530.8 million | $256.8 million | Increase from prior-year impairment charges |
| Operating margin | 5.4% | 2.9% | 250 basis-point increase |
| Net income attributable to EMCOR | $383.5 million | $132.9 million | 188.5% increase |
| Diluted EPS | $7.06 | $2.40 | Increase |
| Operating cash flow | $318.8 million | $806.4 million | $487.5 million decrease |
| Capital expenditures | $36.2 million | $48.0 million | Decrease |
| Acquisition spending | $118.2 million | $50.4 million | Increase |
Operating income in 2020 included $232.8 million of non-cash impairment charges, primarily related to the United States industrial services segment. Excluding that charge, 2021 operating income increased by approximately $41.2 million. The 2021 effective tax rate was 27.5%, compared with 47.3% in 2020, primarily because most of the prior-year impairment charge was not tax deductible.
Segment performance and material changes
- United States electrical construction revenue increased to $2.015 billion from $1.806 billion; operating income increased to $168.4 million from $161.8 million, while operating margin declined to 8.4% from 9.0%.
- United States mechanical construction revenue increased to $3.923 billion from $3.485 billion; operating income increased to $319.1 million from $292.5 million, while operating margin declined to 8.1% from 8.4%.
- United States building services revenue increased to $2.469 billion from $2.134 billion; operating income increased to $119.0 million from $114.2 million, while operating margin declined to 4.8% from 5.3%.
- United States industrial services revenue increased modestly to $986.4 million from $940.9 million, but the segment reported a $1.7 million operating loss versus $1.2 million of operating income in 2020. Oil and gas market weakness, pricing pressure, customer bankruptcies, and a $5.8 million credit-loss provision remained significant factors.
- United Kingdom building services revenue increased to $510.0 million from $430.6 million; operating income increased to $28.0 million from $20.7 million, and operating margin improved to 5.5% from 4.8%.
- Remaining performance obligations increased 21.9% to $5.599 billion from $4.595 billion. Approximately $4.670 billion was expected to be recognized within one year, although some contracts may be delayed, modified, or canceled.
- EMCOR acquired eight companies in 2021 for total consideration of $131.2 million. Acquisitions contributed $196.3 million of incremental revenue and $4.0 million of incremental operating income in 2021, including amortization expense.
Liquidity, debt, capital allocation, and other financial matters
- Cash and cash equivalents were $821.3 million at December 31, 2021; cash, cash equivalents, and restricted cash totaled $822.6 million.
- The company had $256.7 million outstanding under its term loan and no direct borrowings under its $1.3 billion revolving credit facility. Available revolving capacity was approximately $1.23 billion after consideration of outstanding letters of credit.
- The term loan requires annual principal payments of approximately $13.9 million, with remaining principal due at maturity on March 2, 2025. EMCOR was in compliance with its debt covenants at year-end.
- Net cash used in financing activities was $245.5 million, including $195.5 million of share repurchases and $28.2 million of dividends. The quarterly dividend was increased to $0.13 per share from $0.08 per share in 2020.
- Approximately 1.6 million shares were repurchased in 2021. Approximately $350.4 million remained authorized for future repurchases at year-end.
- Known obligations included $317.8 million of future lease payments, $1.73 billion of open purchase obligations, $178.6 million of net insurance liabilities, and $51 million of deferred payroll taxes expected to be paid in the fourth quarter of 2022.
- Surety bonds are important to the business. Estimated exposure assuming defaults on all existing bonded contractual obligations was approximately $1.5 billion, or 26% of remaining performance obligations.
Outlook, management commentary, risks, and unusual items
Management described itself as cautiously optimistic about its markets and customers, citing revenue growth, higher remaining performance obligations, and recovery in most businesses from the most severe effects of the COVID-19 pandemic. The filing does not provide a specific numerical revenue, earnings, or margin guidance forecast.
- Supply-chain disruptions, extended lead times, material shortages, inflation, and higher fuel prices reduced margins in several operations and continued into 2022. Fixed-price contracts may limit the company’s ability to recover cost increases.
- The United States industrial services segment remained exposed to oil and gas industry conditions. A further deterioration could result in additional goodwill or other asset impairment charges; no impairment was recorded in 2021.
- COVID-19 risks included project delays or cancellations, workforce restrictions, customer access limitations, testing costs, supply-chain effects, and customer credit deterioration.
- Revenue recognition relies substantially on estimates of costs to complete and transaction prices for construction contracts. Management estimated that a 50 basis-point change in aggregate estimated gross profit margins on uncompleted construction projects could change 2021 operating income by approximately $60 million.
- Accounts receivable increased to $2.205 billion from $1.922 billion, and the allowance for credit losses increased to $23.5 million from $18.0 million. The increase was concentrated in the industrial services segment.
- EMCOR participates in approximately 200 multiemployer pension plans. Contributions were $396.5 million in 2021, and potential withdrawal liabilities cannot be reasonably estimated and could be material.
- The company is substantially self-insured for certain casualty and healthcare risks. Insurance liabilities, litigation, environmental matters, government-contract compliance, labor availability, cybersecurity, severe weather, climate regulation, and foreign-exchange movements remain material risk areas.
- Goodwill was $890.3 million and indefinite-lived trade names were $215.8 million at year-end. The industrial services reporting unit had the smallest impairment-testing cushion; a 10% decline in its estimated fair value would cause fair value to approximate carrying value.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021.
Important facts for investors to verify
- Whether supply-chain, labor, commodity, and fuel-cost pressures continue to compress gross margins, particularly on fixed-price projects.
- Whether the industrial services segment returns to profitability and whether oil and gas market conditions create future impairment or credit-loss charges.
- The collectability and timing of the $2.205 billion accounts receivable balance, $230.1 million of contract assets, and $375.3 million of billed retainage.
- The conversion of the $5.599 billion remaining performance obligation balance into revenue and cash, including exposure to cancellation, delay, or scope changes.
- Potential obligations from surety bonds, multiemployer pension plans, self-insurance, litigation, environmental claims, and government-contract matters.
- Whether share repurchases and dividends remain consistent with operating cash flow after acquisitions, working-capital investment, debt service, and deferred payroll-tax payments.