EMCOR Group, Inc. — Q3 2012 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012; filed October 25, 2012. EMCOR provides electrical and mechanical construction and facilities services in the United States and United Kingdom through approximately 70 operating subsidiaries and joint ventures. The 2011 comparison reflects Canada as a discontinued operation following its August 2011 sale.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $1.606 billion | $1.482 billion | $4.735 billion | $4.095 billion |
| Gross profit | $203.2 million | $188.3 million | $577.9 million | $519.6 million |
| Gross margin | 12.7% | 12.7% | 12.2% | 12.7% |
| Operating income | $68.6 million | $56.5 million | $171.1 million | $148.4 million |
| Operating margin | 4.3% | 3.8% | 3.6% | 3.6% |
| Income from continuing operations | $40.3 million | $33.1 million | $102.1 million | $87.4 million |
| Net income attributable to EMCOR | $39.6 million | $40.8 million | $100.2 million | $94.2 million |
| Diluted EPS from continuing operations | $0.59 | $0.47 | $1.48 | $1.24 |
Cash flow from operations was $42.0 million for the first nine months, versus $58.7 million in the prior-year period, primarily because of higher accounts receivable and other working-capital uses. Investing cash outflow was $48.1 million, compared with $294.3 million in 2011, when acquisition spending was substantially higher. Financing cash outflow was $33.1 million, reflecting $23.9 million of share repurchases, $10.0 million of dividends, and other items.
Cash and cash equivalents declined to $474.4 million at September 30, 2012 from $511.3 million at December 31, 2011. Total debt was approximately $156.0 million, including $150.0 million drawn under the revolving facility. The $750.0 million facility expires November 21, 2016, with approximately $80.0 million of letters of credit outstanding and substantial unused borrowing capacity. Total assets were $3.053 billion and total equity was $1.329 billion.
Material changes versus the prior comparable period
- Q3 revenue increased 8.4%; nine-month revenue increased 15.6%. Growth reflected higher activity across most segments and $27.3 million of Q3 revenue and $275.6 million of nine-month revenue from acquired businesses.
- Q3 operating income increased 21.5%, and operating margin improved to 4.3% from 3.8%. The improvement was led by United States facilities services and United States electrical construction and facilities services.
- Nine-month operating income increased 15.3%, while operating margin remained 3.6%. Nine-month gross margin declined to 12.2% from 12.7%, principally because of weaker margins in United States mechanical construction and facilities services and the United Kingdom segment, unfavorable performance from certain 2011 acquisitions, and a favorable project resolution in the 2011 comparison.
- United States mechanical construction and facilities services operating income declined to $27.2 million in Q3 from $33.6 million and to $79.0 million for nine months from $79.7 million, despite higher revenue.
- United States facilities services operating income increased to $32.0 million in Q3 from $17.1 million and to $59.9 million for nine months from $47.2 million. Results benefited from industrial, mobile mechanical, and government site-based operations, as well as reversals of contingent consideration.
- Interest expense declined to $1.8 million in Q3 and $5.5 million for nine months, from $2.8 million and $8.4 million, respectively, primarily because of lower rates under the 2011 credit facility.
- Backlog was $3.38 billion at September 30, 2012, versus $3.54 billion a year earlier and $3.33 billion at December 31, 2011.
- The company repurchased approximately 0.9 million shares for $23.9 million during 2012 and had approximately $48.6 million remaining under its authorization. It declared $0.15 per share of dividends during the first nine months.
Outlook, management commentary, risks and unusual items
Management remained cautiously optimistic, citing excellent large-project execution and increased demand in selected industrial and oil and gas markets. The company continued to emphasize disciplined bidding and accepting work only when it believes reasonable margins can be achieved. No quantitative earnings or revenue guidance was provided in the filing.
- Management expects current cash, operating cash generation, and available revolver capacity to support foreseeable liquidity and capital expenditures, but noted that macroeconomic weakness could adversely affect liquidity and working-capital needs.
- Long-term demand remains dependent on non-residential construction activity, interest rates, government economic policy, and customer creditworthiness.
- Construction contracts involve percentage-of-completion estimates, claims, change orders, collectibility judgments, and potential revisions to projected costs and margins. Net over-billings were $299.7 million at September 30, 2012, down from $326.9 million at December 31, 2011.
- Surety bonds supported approximately $935.6 million of estimated contractual exposure, assuming defaults on all covered obligations. Reduced surety capacity could materially affect bidding, operations, financial position, or cash flow.
- The company had approximately $1.523 billion of contractual obligations, including $872.7 million of open purchase obligations, $201.9 million of operating leases, and $273.6 million of other long-term obligations. Open purchase orders are generally expected to be recovered through customer billings.
- An asbestos-related gasket matter remains under review. The company cannot reasonably estimate ultimate liability but does not currently expect a material adverse effect and intends to seek supplier reimbursement for related expenditures.
- Weather affected facilities-services results: warm winter conditions reduced snow-removal revenue, while favorable Q3 weather helped certain weather-dependent operations. A return to historical snowfall patterns and future operating performance are relevant to impairment risk.
- No goodwill or other identifiable-intangible impairment was recognized through the first nine months. The October 1, 2012 impairment testing had not yet been completed; future impairment charges cannot be determined from the filing.
- The company was subject to tax examinations for various years and had $5.4 million of unrecognized tax benefits and $2.6 million of accrued related interest at September 30, 2012. It also reported ordinary-course litigation with claims ranging from several thousand dollars to more than $10 million, none of which management expected to be material.
- Disclosure controls and procedures were evaluated as effective, with no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Verify whether backlog conversion, contract awards, and margin trends support revenue growth, particularly in the United Kingdom, electrical construction, and facilities services segments.
- Assess accounts receivable growth, contract assets, net over-billings, and operating cash conversion.
- Review the credit facility covenants, collateral provisions, variable-rate exposure, letters of credit, and November 2016 maturity.
- Monitor gross-margin recovery in mechanical construction and the performance of acquired facilities-services businesses, including weather sensitivity.
- Review the results of the October 1, 2012 goodwill and intangible-asset impairment tests when disclosed.
- Evaluate surety-bond availability, litigation and asbestos contingencies, tax examinations, and the company’s ability to fund dividends and share repurchases from operations.