EMCOR Group, Inc. — 2015 First-Quarter Form 10-Q Summary
Business context and reporting period
EMCOR is a provider of electrical and mechanical construction, facilities, building and industrial services through approximately 70 operating subsidiaries and joint ventures in the United States and United Kingdom. This unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. United Kingdom construction operations were discontinued in 2014 and are presented as discontinued operations.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $1.589 billion | $1.591 billion | Down 0.1% |
| Gross profit | $216.9 million | $216.2 million | Up $0.7 million |
| Gross margin | 13.7% | 13.6% | Up 0.1 percentage point |
| Operating income | $55.3 million | $72.1 million | Down $16.8 million |
| Operating margin | 3.5% | 4.5% | Down 1.0 percentage point |
| Income from continuing operations | $33.1 million | $43.9 million | Down $10.8 million |
| Net income attributable to EMCOR | $32.8 million | $41.3 million | Down $8.4 million |
| Diluted EPS from continuing operations | $0.52 | $0.64 | Down $0.12 |
| Net cash used in operating activities | $17.8 million | $24.3 million | Improved by $6.5 million |
SG&A increased to $161.6 million, or 10.2% of revenue, from $143.9 million, or 9.0%, primarily due to higher medical costs, incentive compensation, salaries and headcount. Interest expense was $2.2 million in both periods. The effective tax rate was approximately 37.9% in 2015 versus 37.7% in 2014.
Backlog was $3.736 billion at March 31, 2015, compared with $3.634 billion at December 31, 2014 and $3.366 billion at March 31, 2014. The filing states that backlog is not a GAAP measure and that contracts may be canceled by customers.
Liquidity, capital resources and debt
- Cash and cash equivalents were $368.9 million at March 31, 2015, down from $432.1 million at December 31, 2014.
- Cash flow used in investing activities was $5.4 million, including $6.9 million of capital expenditures.
- Cash flow used in financing activities was $37.8 million, including $21.1 million of share repurchases, $5.0 million of dividends, $5.4 million of debt and capital lease repayments, and $7.5 million of distributions to noncontrolling interests.
- Total debt and capital lease obligations were $330.0 million, including a $328.1 million term loan. No revolving credit borrowings were outstanding.
- The company maintained a $750 million revolving credit facility expiring November 25, 2018, with approximately $101.6 million of letters of credit outstanding. The term loan interest rate was 1.43% at March 31, 2015.
- EMCOR was in compliance with its debt covenants. Management stated that cash balances, operating cash flow and available revolver capacity should provide sufficient short-term and foreseeable long-term liquidity.
Material changes versus the prior comparable period
- Revenue was broadly stable, but operating income declined 23% because SG&A rose substantially despite slightly higher gross profit and gross margin.
- United States electrical construction revenue increased to $319.0 million, but operating income fell to $16.7 million from $21.7 million.
- United States mechanical construction revenue decreased slightly to $511.0 million, while operating income improved to $20.9 million from $19.1 million.
- United States building services revenue declined by $8.6 million, but operating income increased by approximately $0.7 million, including approximately $3.0 million of income from a favorable claim settlement, net of associated legal costs.
- United States industrial services operating income fell to $12.8 million from $23.4 million. Results were affected by an oil-refinery union strike, delayed or potentially lost high-margin turnaround work, higher employee costs and unfavorable project mix.
- United Kingdom building services revenue and operating income declined, partly due to unfavorable British pound exchange rates and lower institutional small-project activity.
- Basic weighted-average shares declined to approximately 63.1 million from 67.2 million, reflecting share repurchases and other share-count changes.
Outlook, risks, contingencies and unusual items
- Management continued to emphasize disciplined bidding in a competitive market, accepting work it believes can be performed at reasonable margins. No formal earnings or revenue guidance was provided in the filing.
- The company expects quarterly dividends of $0.08 per share to continue for the foreseeable future, subject to credit agreement limitations and operating performance.
- Remaining assets and liabilities from discontinued United Kingdom construction operations included $1.1 million of employee severance and leased-facility obligations, mostly expected to be paid in 2015. Further income or expense is expected to be immaterial.
- A California janitorial-services class action was subject to a proposed consent decree requiring aggregate payments of approximately $2.3 million and enhanced subcontractor monitoring; the settlement had been accrued at December 31, 2014 and was expected to be paid in 2015.
- EMCOR estimated aggregate exposure under surety bonds of approximately $1.2 billion, assuming defaults on all covered contractual obligations. A reduction in surety capacity could materially affect bidding, liquidity or results.
- Government audits, investigations, litigation and other claims were disclosed. Management believes they will not materially affect the company, but stated that certain litigation outcomes cannot be estimated with certainty.
- Goodwill and net identifiable intangible assets totaled $834.1 million and $492.6 million, respectively. No impairment was recorded, but weaker industrial or oil-and-gas market performance could increase impairment risk.
- The company is exposed to variable interest rates, customer credit and collection risk, construction-market conditions, foreign currency movements, and copper, steel and fuel costs. A 25-basis-point interest-rate increase was estimated to raise after-tax interest expense by approximately $0.5 million over the next twelve months.
- The filing identifies no material restructuring expenses expected from continuing operations during the remainder of 2015 and no material contract losses recognized in the quarter.
Most important facts for investors to verify
- Whether the higher SG&A burden, particularly employee benefits and incentive compensation, normalizes or continues to pressure operating margins.
- Whether refinery strikes, project timing and industrial-services mix continue to affect high-margin turnaround work.
- The sustainability and nonrecurring nature of the approximately $3.0 million favorable claim settlement in United States building services.
- Backlog conversion, cancellations and the profitability of the $3.736 billion backlog.
- Operating cash flow and working-capital trends, including net over-billings of $249.6 million at March 31, 2015.
- Availability of surety bonds and the potential effect of the approximately $1.2 billion estimated surety exposure.
- Progress and final costs of discontinued United Kingdom operations and the California janitorial settlement.
- Future impairment risk for goodwill and intangible assets, particularly in United States industrial services.