EMCOR Group, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
EMCOR provides electrical and mechanical construction, facilities services, building services, and industrial services through operations in the United States and United Kingdom. The filing covers the three and six months ended June 30, 2020; financial statements are unaudited. Results were materially affected by the COVID-19 pandemic, related project delays and access restrictions, and the sharp decline in oil prices affecting industrial services.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.014 billion | $2.324 billion | $4.314 billion | $4.483 billion |
| Gross profit | $315.3 million | $346.4 million | $648.3 million | $655.1 million |
| Gross margin | 15.7% | 14.9% | 15.0% | 14.6% |
| Operating income (loss) | $(122.6) million | $120.0 million | $(16.6) million | $222.3 million |
| Operating margin | (6.1)% | 5.2% | (0.4)% | 5.0% |
| Net income (loss) | $(83.7) million | $84.0 million | $(8.0) million | $156.4 million |
| Diluted EPS | $(1.52) | $1.49 | $(0.14) | $2.77 |
- Operating results included $232.8 million of non-cash impairment charges, comprising $225.5 million of goodwill impairment and $7.3 million of identifiable intangible and other long-lived asset impairments. Excluding these charges, operating income declined by $9.8 million in the quarter and $6.2 million year to date.
- SG&A declined to $205.2 million in Q2 from $226.2 million, but increased as a percentage of revenue to 10.2% from 9.7%. Cost reductions included lower headcount, furloughs, salary reductions, lower incentive compensation, and reduced discretionary spending.
- Net cash provided by operating activities was $276.7 million for the six months, compared with $42.2 million of cash used in the prior-year period. The improvement primarily reflected lower receivables, deferred tax payments, and deferred employer payroll taxes under the CARES Act.
- Cash, cash equivalents, and restricted cash totaled $482.3 million at June 30, 2020, compared with $359.9 million at December 31, 2019.
- Investing cash outflow was $28.3 million, including $26.0 million of capital expenditures. Financing cash outflow was $121.3 million, including $99.0 million of share repurchases and $8.9 million of dividends.
- Total debt was $304.4 million, including a $300.0 million term loan; there were no direct revolver borrowings. The $1.3 billion revolving facility had $79.0 million of letters of credit outstanding and expires March 2, 2025. The Company was in compliance with its debt covenants at June 30, 2020.
- Accounts receivable, net, were $1.936 billion. The allowance for credit losses increased to $21.0 million from $14.5 million at year-end, reflecting COVID-19-related collection risk and expected economic conditions.
Material changes versus the prior comparable period
- Q2 revenue decreased 13.3%, with declines in every reportable segment. U.S. industrial services revenue fell 28.2% to $212.2 million, while U.S. electrical construction revenue declined 21.7% to $445.9 million.
- U.S. mechanical construction was comparatively resilient, with Q2 revenue down 4.0% but operating income up to $66.9 million from $54.0 million. Six-month revenue increased 3.1%, partly due to acquisitions.
- U.S. industrial services operating margin fell to 1.4% from 5.4%, reflecting lower oil-and-gas demand, deferred or canceled projects, reduced capital spending, and unfavorable project mix.
- Remaining performance obligations increased approximately 13.7% from December 31, 2019 to $4.591 billion, including $3.699 billion expected to be recognized within one year. Management cautioned that COVID-19 could delay or reduce conversion of this backlog.
- The Company adopted the expected credit loss standard on January 1, 2020, recording a $2.3 million after-tax reduction to retained earnings.
- The Company amended its credit agreement on March 2, 2020, replacing the prior facility with a $1.3 billion revolver and $300.0 million term loan.
Guidance, outlook, risks, and unusual items
The filing does not provide specific quantitative revenue or earnings guidance. Management reported indications of stabilization in construction and building services as restrictions eased, but stated that the trend might not continue. The duration and severity of COVID-19, renewed shutdowns, customer demand, project delays, labor productivity, supply availability, and customer creditworthiness remain uncertain.
- The United States industrial services reporting unit was tested for impairment using a 12.0% weighted average cost of capital and 2.0% perpetual growth rate. Its carrying value equaled estimated fair value after the impairment; further adverse changes could produce additional impairment charges.
- A February 2020 ransomware attack temporarily disrupted portions of the information technology network. The investigation did not identify exfiltration of customer or employee data or inappropriate access to accounting and finance systems. Insurance may not fully cover related costs.
- Surety-bond exposure was approximately $1.4 billion based on project completion percentages, or about 30% of remaining performance obligations. Reduced surety capacity could restrict bidding or require alternative collateral.
- Legal proceedings, government audits and investigations, insurance liabilities, credit losses, contract claims, and unapproved change orders remain contingencies. Management does not currently expect these matters to have a material adverse effect, but litigation outcomes are uncertain.
- The Company repurchased approximately 1.5 million shares for $99.0 million during the first half of 2020 and continued paying a quarterly dividend of $0.08 per share.
Most important facts for investors to verify
- Whether COVID-19-related delays, customer credit deterioration, or project cancellations reduce conversion of the $4.591 billion remaining performance obligation balance.
- Whether the U.S. industrial services segment stabilizes and whether additional goodwill or intangible-asset impairments become necessary.
- The sustainability of operating cash flow after temporary benefits from lower receivables, tax deferrals, and payroll-tax deferrals.
- Compliance with credit-agreement covenants, revolver availability after letters of credit, and the scheduled term-loan payments.
- Future demand in non-residential construction, building services, and oil-and-gas markets, including the effect of commodity prices and renewed pandemic restrictions.
- Actual costs and insurance recoveries associated with the ransomware incident, litigation, insurance claims, and surety-bond obligations.