Business Context and Reporting Period
EMCOR Group, Inc. provides electrical and mechanical construction, facilities, building, and industrial services through approximately 80 operating subsidiaries and joint ventures in the United States and United Kingdom. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $2.300 billion | $2.159 billion | +6.5% |
| Gross profit | $333.1 million | $308.8 million | +7.9% |
| Gross margin | 14.5% | 14.3% | +20 basis points |
| Operating income | $106.0 million | $102.3 million | +3.6% |
| Operating margin | 4.6% | 4.7% | Down 10 basis points |
| Net income | $75.7 million | $72.4 million | +4.5% |
| Diluted EPS | $1.35 | $1.28 | +5.5% |
| Operating cash flow | $(78.8) million | $(57.4) million | Higher use of $21.4 million |
| Capital expenditures | $12.0 million | $13.1 million | Lower by $1.1 million |
| Cash, cash equivalents and restricted cash | $348.1 million | $254.3 million | Prior-year comparison |
SG&A increased to $227.0 million from $206.2 million, and SG&A as a percentage of revenue increased to 9.9% from 9.6%. The effective tax rate was 27.4%, compared with 27.5% in the prior-year quarter. The company declared a quarterly dividend of $0.08 per share.
Segment Performance and Material Changes
- U.S. mechanical construction and facilities services revenue increased 10.9% to $834.1 million, supported by acquisitions and stronger manufacturing, healthcare, institutional, and transportation activity. Operating income increased to $45.2 million from $41.0 million.
- U.S. industrial services revenue increased 19.9% to $310.0 million, primarily from stronger field-services demand. Operating income increased to $12.3 million from $9.6 million.
- U.S. building services revenue increased 1.2% to $518.1 million, but operating income declined to $20.8 million from $27.5 million. Lower snow-removal activity, reduced energy-services project activity, contract losses, unfavorable work mix, and higher credit-loss provisions pressured results.
- U.S. electrical construction and facilities services revenue declined slightly to $525.2 million from $528.1 million, while operating income increased to $43.9 million from $43.0 million.
- United Kingdom building services revenue increased to $112.4 million from $107.5 million, and operating income increased to $5.8 million from $4.1 million. Foreign exchange reduced revenue by approximately $2.2 million.
- Acquisitions completed in 2019 and January 2020 contributed $82.5 million of incremental revenue and $3.6 million of incremental operating income, including $4.1 million of amortization expense.
- Remaining performance obligations increased to $4.424 billion at March 31, 2020, from $4.036 billion at December 31, 2019 and $4.157 billion at March 31, 2019. Approximately $3.573 billion was expected to be recognized within one year.
Balance Sheet, Debt, Liquidity and Cash Flow
- Cash and cash equivalents were $347.1 million at March 31, 2020, compared with $358.8 million at December 31, 2019. Accounts receivable were $2.055 billion, and contract assets were $195.3 million.
- The allowance for credit losses increased to $20.0 million from $14.5 million, reflecting the adoption of the expected-credit-loss model and management’s assessment of future economic conditions, including COVID-19 risks.
- Total debt increased to $504.5 million from $312.2 million at year-end 2019. Debt included $200.0 million drawn on the revolving facility and a $300.0 million term loan.
- On March 2, 2020, EMCOR entered into a new credit agreement with a $1.3 billion revolving facility and a $300.0 million term loan, expiring March 2, 2025. Approximately $79.0 million of letters of credit were outstanding at March 31, 2020. The company was in compliance with its debt covenants.
- Operating cash flow was negative primarily because of the timing of customer receipts. Financing cash flow was positive $86.1 million, including net borrowings and a $99.0 million share repurchase.
- During the quarter, EMCOR repurchased approximately 1.5 million shares for $99.0 million. Approximately $259.5 million remained available under the repurchase authorization at March 31, 2020.
- Management stated that available cash, operating cash generation, revolving-credit capacity, and other financing sources are expected to provide sufficient short-term and foreseeable long-term liquidity, but acknowledged that delayed receivable collections and higher credit losses could reduce liquidity.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide numerical revenue or earnings guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year 2020 results.
- COVID-19 had no material adverse impact on first-quarter results, but the company began experiencing disruptions, including work stoppages, job-site delays, facility-access restrictions, reduced customer capital spending, and potential supply-chain effects. Management implemented business-continuity plans and short-term cost reductions, including reductions in executive and director compensation.
- COVID-19 could cause customers to delay or terminate projects, reduce demand, impair collections, increase credit losses, and lower the value or timing of remaining performance obligations. The duration and ultimate financial impact were described as highly uncertain.
- On February 15, 2020, the company identified an infiltration and encryption of portions of its information-technology network. Systems were temporarily disrupted; the investigation had not identified exfiltration of customer or employee data or inappropriate access to accounting or finance systems as of the filing date. Insurance may not fully offset related costs.
- Surety bonds are important to the construction business. EMCOR estimated aggregate exposure of approximately $1.3 billion based on bonded projects and stated that reduced surety capacity could materially affect bidding, liquidity, results, or cash flow.
- The company adopted ASC 326 on January 1, 2020, resulting in a $2.3 million after-tax reduction to retained earnings. No significant contract losses, goodwill impairment, or identifiable-intangible-asset impairment were recognized in the quarter.
- Restructuring expense was $0.1 million, with $1.1 million of restructuring obligations remaining. No material additional restructuring expense was expected under current plans.
- Variable-rate debt creates interest-rate exposure; a 100-basis-point increase in rates was estimated to increase after-tax interest expense by approximately $3.7 million over the next 12 months based on $500.0 million of borrowings.
Most Important Facts for Investors to Verify
- Whether COVID-19 caused material project delays, cancellations, customer-payment issues, or margin deterioration after March 31, 2020.
- Trends in operating cash flow, receivable collections, contract assets, and the allowance for credit losses.
- Availability under the $1.3 billion revolving facility, covenant compliance, and the effect of variable interest rates on debt service.
- Whether the U.S. building services segment’s margin decline persisted and whether industrial-services demand was affected by oil-market conditions.
- Whether the $4.424 billion remaining performance obligation balance converted to revenue as expected, particularly the portion subject to customer cancellation or project delays.
- The financial and operational consequences of the February 2020 cyberattack, including any uninsured costs or subsequent data-access findings.
- Potential goodwill or intangible-asset impairment, especially in the U.S. industrial services segment, if COVID-19 or oil-market weakness reduces projected cash flows.