EMCOR Group, Inc. — First Quarter 2016 Form 10-Q Summary
Business Context and Reporting Period
EMCOR provides electrical and mechanical construction, facilities services, building services and industrial services through approximately 70 operating subsidiaries and joint ventures in the United States and United Kingdom. This unaudited filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
The former United Kingdom construction operations remain classified as discontinued operations following the company’s withdrawal from that market. Continuing operations comprise U.S. electrical construction and facilities services, U.S. mechanical construction and facilities services, U.S. building services, U.S. industrial services and U.K. building services.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $1.745 billion | $1.589 billion | Up 9.8% |
| Gross profit | $223.1 million | $216.9 million | Up $6.2 million |
| Gross margin | 12.8% | 13.7% | Down 90 basis points |
| Operating income | $55.6 million | $55.3 million | Up $0.3 million |
| Operating margin | 3.2% | 3.5% | Down 30 basis points |
| Income from continuing operations | $34.4 million | $33.1 million | Up $1.4 million |
| Net income attributable to EMCOR | $34.3 million | $32.8 million | Up $1.5 million |
| Diluted EPS from continuing operations | $0.56 | $0.52 | Up $0.04 |
| Cash flow from operating activities | $(37.2) million | $(17.8) million | Greater use of cash |
- Revenue increased across all reportable segments. U.S. mechanical construction revenue rose $100.9 million, U.S. industrial services revenue rose $24.8 million, and U.S. electrical construction revenue rose $29.3 million.
- U.S. building services operating income declined $7.1 million, partly because Q1 2015 included a $3.0 million favorable claim settlement. Less snow removal activity and weaker results in commercial and government site-based operations also contributed.
- U.S. industrial services operating income increased $6.0 million, benefiting from the absence of the prior-year refinery union strike impact.
- U.S. mechanical construction operating income increased $3.0 million, including $0.7 million of operating income from companies acquired in 2015, net of related amortization.
- SG&A increased to $167.4 million from $161.6 million, but declined as a percentage of revenue to 9.6% from 10.2%. The increase included higher salaries, incentive compensation, legal and professional fees, and $1.1 million of transaction costs related to an April 2016 acquisition.
- The effective tax rate, inclusive of discrete items, decreased to 35.5% from 37.9%, primarily because of $1.2 million of tax benefits from share-based compensation.
Balance Sheet, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $392.4 million at March 31, 2016, down from $486.8 million at December 31, 2015.
- Operating activities used $37.2 million of cash, primarily because of higher income tax payments and a $9.7 million decrease in net over-billings associated with the timing of customer billings and collections.
- Investing activities used $8.8 million, including $9.0 million of capital expenditures. Financing activities used $47.3 million, including $26.1 million for share repurchases, $4.9 million for dividends and $4.4 million for long-term debt repayments.
- Total debt was $311.4 million, consisting primarily of a $310.6 million term loan. The revolving credit facility had no outstanding borrowings and provides $750.0 million of committed capacity, subject to covenants and letters of credit.
- Letters of credit outstanding were approximately $103.9 million. The company was in compliance with its credit agreement covenants at March 31, 2016.
- Net over-billings were $286.5 million, down from $311.5 million at December 31, 2015. Management believes existing cash, operating cash flow and revolving-credit capacity will be sufficient for foreseeable liquidity needs.
- The company declared a quarterly dividend of $0.08 per share and repurchased approximately 0.6 million shares for $26.1 million during the quarter. Approximately $228.1 million remained available under repurchase authorizations.
Material Changes, Outlook and Unusual Items
- Backlog increased to $3.851 billion at March 31, 2016, compared with $3.771 billion at December 31, 2015 and $3.736 billion at March 31, 2015. U.S. mechanical construction represented 46% of total backlog and U.S. electrical construction represented 29%.
- On April 15, 2016, EMCOR completed the $205.0 million acquisition of Ardent Services, L.L.C. and Rabalais Constructors, LLC, which provide electrical and instrumentation services to the North American energy infrastructure market. The acquisition will be reported in the U.S. electrical construction and facilities services segment.
- On April 1, 2016, EMCOR acquired a mobile mechanical services company for an immaterial amount.
- Restructuring expense was $0.1 million in Q1 2016. Remaining restructuring obligations were $0.2 million and were expected to be paid in Q2 2016; no material additional restructuring expense was expected for the remainder of 2016.
- The filing does not provide formal revenue or earnings guidance. Management cited demand for non-residential construction, building and industrial services, macroeconomic conditions, interest rates, government policy and the ability to execute contracts as important longer-term variables.
- Key risks include fixed-price project losses, construction-market cyclicality, customer collectibility, working-capital requirements, commodity and fuel costs, variable-rate debt, foreign exchange, insurance claims, litigation and the availability of surety bonds. Aggregate estimated exposure under surety bonds, assuming defaults on all covered contractual obligations, was approximately $1.2 billion.
- EMCOR is involved in government audits, investigations and litigation, including arbitration related to a 2010 construction-project explosion. Management believes these matters will not have a material adverse effect, but the filing states that potential losses in the explosion-related matter cannot be estimated with certainty.
- No goodwill or identifiable intangible-asset impairment was recognized. Management noted that weaker future performance, particularly in U.S. industrial services and oil-and-gas-related markets, could increase impairment risk.
Investor Verification Checklist
- Verify whether the lower gross and operating margins persist after the effects of the prior-year claim settlement, reduced snow activity and transportation-project losses.
- Assess the integration, financing impact and subsequent contribution of the $205.0 million Ardent acquisition.
- Monitor operating cash conversion, net over-billings, receivables and contract estimates as backlog expands.
- Review exposure to fixed-price construction contracts, project claims, change orders and potential losses on uncompleted contracts.
- Track debt maturities, variable interest rates, credit-facility availability and the November 2018 maturity of the credit agreement.
- Evaluate surety-bond capacity, letters of credit and contingent exposure from guarantees, litigation and government investigations.
- Consider the sensitivity of goodwill and intangible assets to industrial-services demand, oil-and-gas conditions, interest rates and forecast revisions.