EMCOR Group, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. EMCOR provides electrical and mechanical construction, facilities, building, and industrial services in the United States and the United Kingdom. During the third quarter, it ceased United Kingdom construction operations; those results are presented as discontinued operations.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $1.567 billion | $1.605 billion | $4.710 billion | $4.684 billion |
| Gross profit | $222.2 million | $206.6 million | $658.7 million | $584.8 million |
| Gross margin | 14.2% | 12.9% | 14.0% | 12.5% |
| Operating income | $73.6 million | $58.0 million | $215.4 million | $164.4 million |
| Operating margin | 4.7% | 3.6% | 4.6% | 3.5% |
| Net income attributable to EMCOR | $45.0 million | $26.7 million | $126.2 million | $77.9 million |
| Diluted EPS from continuing operations | $0.68 | $0.43 | $1.92 | $1.40 |
- Q3 revenue declined 2.4%, while nine-month revenue increased 0.6%. The nine-month increase was primarily driven by acquired businesses and stronger United States industrial services revenue.
- Gross profit and operating margins improved substantially, supported by better performance across most segments and the absence of significant project write-downs recorded in 2013.
- Q3 operating income included an $11.7 million gain on the sale of a building. The gain increased Q3 operating margin by approximately 0.7 percentage points and the nine-month margin by approximately 0.2 percentage points.
- SG&A expense increased to $160.0 million in Q3 and $454.2 million for nine months, representing 10.2% and 9.6% of revenue, respectively, versus 9.2% and 9.0% in the prior-year periods.
- Discontinued United Kingdom construction operations generated losses of $0.6 million in Q3 and $4.1 million for nine months, compared with losses of $3.0 million and $17.6 million in 2013.
Cash Flow, Debt, and Liquidity
- Cash provided by operating activities was $109.0 million for the first nine months of 2014, up from $68.0 million in 2013.
- Cash used in investing activities was $13.3 million, compared with $467.2 million in 2013, when EMCOR funded the RepconStrickland acquisition.
- Cash used in financing activities was $97.5 million, reflecting $76.4 million of share repurchases, $13.1 million of long-term debt repayments, and $16.1 million of dividends paid.
- Cash and cash equivalents were $437.4 million at September 30, 2014, compared with $439.8 million at December 31, 2013.
- Total debt was $340.4 million, including a $336.9 million term loan; there were no borrowings under the $750.0 million revolving credit facility. Approximately $97.2 million of letters of credit were outstanding.
- The term loan bears variable interest and had an effective rate of 1.40% at September 30, 2014. A 25-basis-point rate increase was estimated to increase next-twelve-month after-tax interest expense by approximately $0.5 million.
- Backlog increased to $3.70 billion at September 30, 2014 from $3.34 billion at December 31, 2013 and $3.36 billion at September 30, 2013.
Material Changes and Unusual Items
- United States industrial services revenue increased $61.6 million in Q3 and $246.3 million for nine months, substantially reflecting the 2013 RepconStrickland acquisition and increased demand for industrial field services.
- United States mechanical construction revenue declined, but segment operating income improved due to better project profitability and the absence of significant 2013 project losses.
- United States building services revenue declined because of lower energy-services project work and termination of a large commercial site-based contract.
- EMCOR recognized $4.8 million of income in the United Kingdom building services segment during the first nine months from reducing an estimate of accrued contract costs.
- EMCOR repurchased approximately 2.0 million shares for $84.6 million during 2014 through September 30. On October 23, 2014, the board authorized an additional $250.0 million repurchase program.
- The company declared quarterly dividends of $0.08 per share, compared with $0.06 per share in the 2013 third quarter.
Outlook, Risks, and Contingencies
Management stated that it remains disciplined in a competitive marketplace and accepts work it believes can be performed at reasonable margins. The filing does not provide formal revenue, earnings, or margin guidance. Management believes existing cash, operating cash flow, and available revolving-credit capacity will support foreseeable liquidity and capital requirements.
- Key operating risks include macroeconomic weakness, reduced nonresidential construction demand, competitive bidding, customer cancellations, commodity and fuel-price inflation, and variable interest rates.
- Fixed-price contracts may limit the company’s ability to recover increases in material or fuel costs.
- Surety bonds supported approximately $1.2 billion of estimated contractual exposure, assuming defaults on all covered obligations. Reduced surety capacity could materially affect bidding, liquidity, or results.
- Material legal matters include an arbitration claim related to an explosion at a construction project and a California class-action lawsuit involving janitorial contractors. Management believes it has meritorious defenses and cannot presently estimate any potential loss from the explosion-related matter.
- Goodwill and identifiable intangible assets totaled $834.1 million and $513.0 million, respectively. No impairment was recorded through the first nine months, but future impairment risk depends on industrial-market demand, projected performance, interest rates, and other valuation assumptions.
- The company had not completed its October 1, 2014 goodwill impairment testing as of the filing date.
- The company is subject to government audits and investigations and various tax examinations; management does not expect currently known matters to have a material effect.
Investor Verification Items
- Separate the $11.7 million building-sale gain and the $4.8 million United Kingdom contract-cost benefit from recurring operating performance.
- Assess whether industrial-services growth and the RepconStrickland acquisition can offset weaker construction and building-services revenue.
- Monitor backlog conversion, contract estimates, unbilled receivables, overbillings, and customer collectibility.
- Review the term-loan amortization schedule, credit-agreement covenants, letters of credit, and surety-bond availability.
- Evaluate the potential impact of the pending litigation, California janitorial class-action claims, and unresolved government or tax matters.
- Reconcile future results to the company’s October 1, 2014 goodwill and intangible-asset impairment testing once disclosed.