EMCOR Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; filed July 29, 2014. EMCOR provides electrical and mechanical construction, facilities, building, and industrial services through approximately 70 operating subsidiaries and joint ventures in the United States and United Kingdom. The 2013 acquisition of RepconStrickland, Inc. (RSI) created the United States industrial services segment and materially affected year-over-year comparisons.
Financial Results and Position
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $1.558 billion | $1.557 billion | $3.157 billion | $3.125 billion |
| Gross profit | $219.6 million | $181.5 million | $434.8 million | $372.7 million |
| Gross margin | 14.1% | 11.7% | 13.8% | 11.9% |
| Operating income | $67.7 million | $36.1 million | $137.1 million | $87.4 million |
| Operating margin | 4.3% | 2.3% | 4.3% | 2.8% |
| Net income attributable to EMCOR | $39.9 million | $21.0 million | $81.2 million | $51.2 million |
| Diluted EPS | $0.59 | $0.31 | $1.19 | $0.75 |
- Six-month operating cash flow was $39.6 million, compared with cash used of $52.2 million in the prior-year period.
- Investing cash outflow was $14.4 million, principally reflecting $16.6 million of capital expenditures. Financing cash outflow was $29.6 million, including $18.3 million of share repurchases, $10.7 million of dividends, and $8.8 million of long-term debt repayments.
- Cash and cash equivalents were $437.1 million at June 30, 2014, compared with $439.8 million at December 31, 2013.
- Total debt and capital lease obligations were $345.3 million, including a $341.3 million term loan. No revolving-credit borrowings were outstanding; approximately $92.4 million of letters of credit used the revolving facility.
- The company had a $750 million revolving credit facility expiring November 25, 2018, with potential expansion to $1.05 billion, subject to lender availability. The term loan interest rate was 1.40% at June 30, 2014.
- Backlog was $3.636 billion at June 30, 2014, up from $3.361 billion at December 31, 2013 and $3.511 billion at June 30, 2013.
- Quarterly dividends increased to $0.08 per share beginning in the first quarter of 2014. The company repurchased approximately 0.4 million shares for $18.7 million during 2014; $103.8 million remained available under repurchase authorizations at June 30, 2014.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue was essentially flat, while six-month revenue increased 1.0%. Acquired companies contributed $85.7 million of second-quarter revenue and $204.7 million of first-half revenue.
- Profitability improved substantially. Second-quarter operating income increased 88%, and first-half operating income increased 57%, aided by improved project performance, lower restructuring costs, and the absence of the significant 2013 project losses in the U.S. mechanical segment.
- U.S. industrial services revenue increased $98.3 million in the quarter and $184.7 million year to date, primarily due to RSI and stronger industrial field-services demand. RSI contributed $1.5 million of second-quarter operating income and $8.8 million year to date, net of intangible-asset amortization.
- U.S. mechanical construction revenue declined $45.4 million in the quarter and $73.5 million year to date, but operating income increased $10.5 million and $18.5 million, respectively.
- U.S. building services revenue declined $30.3 million in the quarter and $37.4 million year to date. Second-quarter operating income decreased $2.8 million, reflecting a terminated commercial contract and lower energy-services project activity.
- United Kingdom revenue declined $20.4 million in the quarter and $41.2 million year to date as EMCOR continued withdrawing from U.K. construction activities. The segment returned to operating profitability, benefiting partly from a $4.8 million reduction in estimated accrued contract costs.
- Restructuring expense decreased to $0.4 million in the quarter and $1.3 million year to date, from $5.8 million and $7.2 million, respectively, in 2013.
- Interest expense increased to $4.5 million year to date from $3.6 million, primarily because of increased borrowings related to the 2013 financing.
Outlook, Risks, Contingencies, and Unusual Items
- No specific revenue or earnings guidance is provided in the filing. Management expects cash balances, operating cash flow, and available revolver capacity to meet foreseeable liquidity and capital-expenditure needs.
- Management remains selective in bidding because of competitive market conditions and accepts work it believes can be performed at reasonable margins. Demand for nonresidential construction remains a key long-term revenue risk.
- Construction contracts use percentage-of-completion accounting and require estimates of total costs, billing, collectibility, claims, and change orders. Contract estimates can change prospectively and may affect future results.
- Surety bonds supported approximately $1.1 billion of estimated contractual exposure. Reduced surety capacity could materially affect the company’s ability to bid for or perform certain projects.
- Material contingencies include government-contract audits and investigations, an arbitration claim related to a project explosion, and a California wage-and-hour class action involving USM and janitorial contractors. Management believes these matters are defensible and not expected to have a material effect, but litigation outcomes are uncertain and the potential loss in the explosion matter cannot be estimated.
- Restructuring obligations remaining at June 30 were reported as approximately $3.6 million in the notes and $3.9 million in MD&A; most payments are expected during 2014, with approximately $0.5 million of additional restructuring expense expected through year-end.
- On July 22, 2014, EMCOR sold a building and expected to record an approximately $11.7 million gain in the third quarter.
- Goodwill and net identifiable intangible assets totaled $834.1 million and $522.5 million, respectively. No impairment was recorded, but industrial-services performance, market conditions, interest rates, and forecast assumptions could affect future impairment testing.
- A new revenue-recognition standard is effective for fiscal years and interim periods beginning after December 15, 2016. EMCOR had not selected a transition method or determined the adoption impact.
Investor Verification Items
- Verify whether revenue growth and backlog conversion are sustainable after separating the impact of RSI and other 2013 acquisitions.
- Assess the recurring versus nonrecurring contribution to margins from the $4.8 million U.K. contract-cost estimate reduction, the $3.0 million acquisition-agreement settlement, and the absence of 2013 project losses.
- Monitor U.S. building-services contract retention, U.K. construction exit costs, and industrial-services demand in refinery and petrochemical markets.
- Review working-capital trends, including net over-billings of $270.5 million, accounts receivable collectibility, and cash conversion.
- Evaluate term-loan repayment requirements, credit-agreement covenants, variable-rate exposure, and the availability of surety bonds and letters of credit.
- Track the disclosed litigation and wage-and-hour matters, as well as potential goodwill or intangible-asset impairment in the industrial-services segment.