EMCOR Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
EMCOR provides electrical and mechanical construction, building services, and industrial services through approximately 75 operating subsidiaries and joint ventures in the United States and United Kingdom. This filing covers the three and nine months ended September 30, 2016; financial statements are unaudited. United Kingdom construction operations remain classified as discontinued operations.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $1.923 billion | $1.699 billion | $5.602 billion | $4.941 billion |
| Gross profit | $268.0 million | $235.4 million | $765.9 million | $691.9 million |
| Gross margin | 13.9% | 13.9% | 13.7% | 14.0% |
| Operating income | $86.1 million | $70.0 million | $234.0 million | $203.0 million |
| Operating margin | 4.5% | 4.1% | 4.2% | 4.1% |
| Net income attributable to EMCOR | $51.5 million | $41.5 million | $141.3 million | $121.2 million |
| Diluted EPS from continuing operations | $0.85 | $0.66 | $2.33 | $1.92 |
Revenue increased 13.2% in the quarter and 13.4% year to date. Operating income increased 23.0% in the quarter and 15.3% year to date. SG&A was $181.4 million in the quarter and $530.7 million year to date, while SG&A as a percentage of revenue improved to 9.4% and 9.5%, respectively, from 9.7% and 9.9%.
Cash and cash equivalents were $504.6 million at September 30, 2016, compared with $486.8 million at December 31, 2015. Operating cash flow was $128.9 million for the first nine months, compared with $95.6 million in the prior-year period. Capital expenditures were $29.3 million, and acquisition payments were $232.9 million.
Total debt and capital lease obligations were $523.3 million before current maturities and unamortized debt issuance costs, compared with $315.1 million at December 31, 2015. Debt included $400.0 million under the term loan and $125.0 million under the revolving facility. The company had approximately $115.4 million of outstanding letters of credit and reported compliance with its credit agreement covenants.
Material Changes Versus the Prior Comparable Period
- Domestic operations generated 96% of revenue, up from 94% in both comparable periods; United Kingdom building services declined because of unfavorable currency translation and weaker commercial project activity.
- United States electrical construction revenue benefited from the Ardent acquisition, which contributed $58.6 million in the quarter and $104.0 million year to date.
- Ardent Services and Rabalais Constructors were acquired on April 15, 2016 for total consideration of $201.4 million, including preliminary goodwill of $119.5 million and identifiable intangible assets of $41.5 million.
- Backlog increased to $3.903 billion at September 30, 2016 from $3.771 billion at December 31, 2015 and $3.765 billion at September 30, 2015.
- Goodwill increased to $979.3 million from $843.2 million at year-end 2015, and net identifiable intangible assets increased to $500.1 million from $472.8 million, primarily reflecting acquisitions.
- Interest expense increased to $3.5 million in the quarter and $9.0 million year to date, primarily because of higher borrowings.
Guidance, Outlook, Risks and Unusual Items
Management described the third quarter as a record third quarter for revenue, operating income, net income attributable to EMCOR, and diluted EPS from continuing operations. No specific quantitative full-year revenue or earnings guidance is provided in the filing.
- A transportation construction project in the Northeastern United States produced losses of $6.9 million in the quarter and $17.4 million year to date because of productivity issues and unfavorable job-site conditions. EMCOR expects completion by year-end 2016 and intends to seek recovery, but recovery is not assured.
- United States industrial services remain exposed to reduced capital spending by large integrated oil companies, which lowered demand for new heat exchangers, although field-services demand improved.
- Revenue and liquidity depend on demand for nonresidential construction, building services, and industrial services; contract timing, customer billing practices, and working-capital requirements can materially affect cash flow.
- Surety bonds support a substantial portion of construction obligations. Estimated exposure assuming default on all existing bonded contractual obligations was approximately $1.1 billion. Reduced surety capacity could materially affect bidding, operations, cash flows, and financial condition.
- The $1.3 billion 2016 Credit Agreement, consisting of a $900.0 million revolving facility and $400.0 million term loan, expires August 3, 2021. Borrowings bear variable interest; a 25-basis-point rate increase was estimated to raise after-tax interest expense by approximately $0.8 million over the next 12 months.
- Remaining discontinued-operation liabilities include approximately $0.1 million of employee severance expected to be paid in 2017. The filing states that additional settlement income or expense is expected to be immaterial.
- Pending government audits, investigations, litigation, insurance claims, uncertain tax positions, commodity costs, fuel prices, foreign exchange, and potential goodwill or intangible-asset impairment remain relevant risks. No material goodwill or intangible impairment was recognized through the first nine months, but the October 1, 2016 testing had not yet been completed.
Important Facts for Investors to Verify
- Whether the Northeastern transportation project achieves completion and recovery of claimed losses.
- Ardent’s post-acquisition revenue, profitability, integration progress, and final purchase-price allocation.
- Trend in backlog conversion, contract margins, change orders, claims, and unbilled receivables.
- Debt repayment capacity, variable-rate exposure, revolver availability after letters of credit, and compliance with financial covenants.
- Future performance of the industrial-services segment and related goodwill impairment sensitivity.
- Exposure from surety bonds, litigation, government-contract investigations, insurance liabilities, and uncertain tax positions.
- Continuation of the $0.08 quarterly dividend and share-repurchase activity, subject to credit-agreement limitations.