EMCOR Group, Inc. annual report, FY2020

EMCOR Group, Inc. 2020 Form 10-K Summary

Business context and reporting period

EMCOR Group is a U.S.-focused provider of electrical and mechanical construction, facilities, building, and industrial services, operating through approximately 85 subsidiaries and serving commercial, industrial, utility, institutional, and government customers. The filing covers the fiscal year ended December 31, 2020; the requested “2020 Q4” is included in the annual filing, with fourth-quarter results separately disclosed in quarterly information.

Approximately 33,000 employees; about 95% of revenue generated in the United States and 5% in the United Kingdom.
2020 revenue mix: approximately 62% construction, 29% building services, and 9% industrial services.
Remaining performance obligations were $4.59 billion at year-end, up 14% from $4.04 billion at December 31, 2019; approximately 83% was expected to be recognized as revenue in 2021.

Financial performance and key metrics

Metric	2020	2019	Change
Revenue	$8.797 billion	$9.175 billion	Down 4.1%
Gross profit	$1.395 billion	$1.356 billion	Up $39.5 million
Gross margin	15.9%	14.8%	Up 110 basis points
Operating income	$256.8 million	$460.9 million	Down $204.1 million
Operating margin	2.9%	5.0%	Down 210 basis points
Net income attributable to EMCOR	$132.9 million	$325.1 million	Down 59.1%
Diluted EPS from continuing operations	$2.40	$5.75	Down 58.3%
Cash flow from operations	$806.4 million	$355.7 million	Up $450.7 million

The $232.8 million of non-cash impairment charges recognized in the second quarter, principally related to the United States industrial services segment, reduced reported operating margin by approximately 270 basis points. Excluding the impairment, management stated that operating income increased $28.7 million and operating margin increased 60 basis points.

Fourth-quarter 2020 revenue was $2.281 billion and net income was $79.8 million, compared with $2.404 billion and $86.9 million, respectively, in the fourth quarter of 2019.
Year-end cash and cash equivalents were $902.9 million, compared with $358.8 million at December 31, 2019.
Accounts receivable were $1.922 billion, net of an $18.0 million credit-loss allowance; the allowance increased from $14.5 million.
Total debt, including finance lease liabilities, was $276.5 million, compared with $312.2 million at year-end 2019. The balance consisted primarily of a $270.6 million term loan.
There were no direct revolver borrowings at year-end; $71.3 million of letters of credit reduced availability under the $1.3 billion revolving facility.
Capital expenditures were $48.0 million. Cash used for acquisitions was $50.4 million, while share repurchases were $112.6 million.

Material changes versus the prior comparable period

United States industrial services revenue declined 26.7% to $797.4 million, and the segment moved from $44.3 million of operating income to a $2.8 million operating loss, reflecting lower oil and gas demand, project deferrals, unfavorable work mix, and hurricane-related stoppages.
United States electrical construction revenue declined 11.0% to $2.0 billion, while operating income increased to $166.5 million from $161.7 million; the operating margin improved to 8.4% from 7.3%.
United States mechanical construction revenue increased 4.3% to $3.5 billion, including acquisition contributions, and operating income increased 30.0% to $292.5 million. Segment margin improved to 8.4% from 6.7%.
United States building services revenue was essentially flat at $2.1 billion, with operating income of $113.4 million versus $114.8 million.
United Kingdom building services revenue increased 1.7% to $430.6 million, and operating income increased to $20.7 million from $18.3 million.
Gross margin improved despite lower revenue, primarily because of favorable execution and project mix in the U.S. construction businesses.
SG&A increased modestly to $903.6 million, but declined excluding acquisition-related expenses. Cost reductions included lower travel, headcount, salary, and benefit costs, partly offset by higher incentive compensation.

Outlook, commentary, risks, contingencies, and unusual items

Management reported stabilization in the U.S. construction and building-services businesses during the second half of 2020 as restrictions eased and customers adapted, but cautioned that the trend might not continue.
COVID-19 caused job-site access restrictions, temporary shutdowns, lower labor efficiency, project delays, and reduced maintenance and service activity. Future impacts remained highly uncertain.
The company stated that it had sufficient resources for short-term and foreseeable long-term liquidity needs, supported by cash from operations and available revolver capacity.
The March 2020 credit agreement matures March 2, 2025. EMCOR was in compliance with its financial covenants at December 31, 2020.
The regular quarterly dividend was $0.08 per share during 2020. The board announced an intended increase to $0.13 per share beginning in the first quarter of 2021, subject to credit agreement limitations.
EMCOR acquired three companies in 2020 for total consideration of approximately $50.2 million, primarily adding U.S. building-services capabilities.
Surety bonds are important to the construction business. Estimated exposure assuming default on all covered contractual obligations was approximately $1.3 billion, or 29% of remaining performance obligations.
The company is effectively self-insured for significant claims and participates in approximately 200 multiemployer pension plans. It reported $204.1 million of contributions to those plans in 2020 but recorded no withdrawal liability; the ultimate exposure is not determinable from the filing.
A February 2020 cyberattack temporarily disrupted portions of the information technology network. The investigation identified no exfiltration of customer or employee data and no inappropriate access to accounting or finance systems.
Legal proceedings, government audits, fixed-price contract exposure, labor availability, commodity costs, customer creditworthiness, foreign exchange, and future goodwill impairment remain material risks.

Most important facts for an investor to verify

Whether the improvement in construction margins is sustainable after COVID-19-related disruptions and acquisition effects normalize.
Recovery, stabilization, or further deterioration in the U.S. industrial-services segment and oil-and-gas end markets.
Conversion and cancellation risk associated with the $4.59 billion remaining performance obligation balance.
Future cash requirements for deferred payroll taxes, leases, pension funding, multiemployer plans, insurance liabilities, and surety-bond collateral.
Sensitivity of the remaining $107.5 million of industrial-services goodwill to revenue, margin, discount-rate, and oil-and-gas market assumptions.
Availability of bonding capacity and revolver capacity under the 2020 credit agreement after letters of credit and other commitments.
Customer collections, retainage realization, and contract assets, including $323.9 million of billed retainage at year-end.
Impact of the planned dividend increase and any future share repurchases on liquidity and covenant headroom.