EMCOR Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The financial statements are unaudited. EMCOR provides electrical and mechanical construction, facilities services, and related services through approximately 70 operating subsidiaries and joint ventures in the United States and United Kingdom.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1.557 billion | $1.590 billion | $3.125 billion | $3.129 billion |
| Gross profit | $181.5 million | $194.0 million | $372.7 million | $374.7 million |
| Gross margin | 11.7% | 12.2% | 11.9% | 12.0% |
| Operating income | $36.1 million | $56.3 million | $87.4 million | $102.5 million |
| Operating margin | 2.3% | 3.5% | 2.8% | 3.3% |
| Net income attributable to EMCOR | $21.0 million | $33.4 million | $51.2 million | $60.6 million |
| Diluted EPS | $0.31 | $0.49 | $0.75 | $0.89 |
| Dividends declared per share | $0.06 | $0.10 | $0.06 | $0.15 |
Six-month operating cash flow was negative $52.2 million, compared with negative $10.6 million in the prior-year period. Investing cash flow was negative $10.4 million and financing cash flow was negative $8.1 million. Cash declined from $605.3 million at December 31, 2012 to $530.4 million at June 30, 2013, primarily because of working-capital usage, including higher accounts receivable and lower accrued liabilities.
At June 30, 2013, total assets were $3.105 billion and total equity was $1.407 billion. Borrowings totaled approximately $155.2 million, including $150.0 million outstanding under the revolving credit facility. The $750.0 million facility expires November 21, 2016; approximately $92.7 million of letters of credit were outstanding, leaving substantial stated borrowing capacity subject to covenants and lender availability.
Material changes versus the prior comparable period
- Second-quarter revenue decreased 2.1%, while six-month revenue was essentially flat year over year.
- Operating income declined 35.8% in the quarter and 14.7% for the six months; diluted EPS declined 36.7% in the quarter and 15.7% for the six months.
- United States electrical construction revenue increased to $336.3 million in the quarter and $643.9 million for the six months. United States facilities services revenue was flat in the quarter but increased $67.5 million for the six months.
- United States mechanical construction revenue decreased $42.7 million in the quarter and $75.7 million for the six months. Two southeastern U.S. projects generated losses of $10.9 million in the quarter and $18.5 million for the six months.
- United Kingdom segment revenue decreased to $109.1 million in the quarter and $228.1 million for the six months. The segment reported operating losses of $4.5 million and $3.3 million, respectively, versus prior-year operating income of $4.0 million and $7.4 million.
- SG&A expense increased to $139.6 million in the quarter and $278.1 million for the six months. Restructuring expense was $5.8 million in the quarter and $7.2 million for the six months, compared with none in 2012.
- Backlog increased to $3.511 billion at June 30, 2013, compared with $3.374 billion at December 31, 2012 and $3.284 billion at June 30, 2012. The filing notes that backlog may include cancellable contracts, pending change orders and claims determined collectible.
Guidance, outlook, risks and unusual items
- EMCOR decided to withdraw from the United Kingdom construction market because of recurring losses and unfavorable market conditions. Management expects approximately $6.0 million of additional United Kingdom construction losses and restructuring expenses during the remainder of 2013 and expects the United Kingdom segment to return to profitability in 2014 through improved facilities services performance.
- The company expects approximately $3.5 million of additional restructuring expense through 2014. Unpaid restructuring obligations were $3.8 million at June 30, 2013.
- EMCOR announced a definitive agreement to acquire RepconStrickland, Inc. for approximately $455.0 million in cash, with closing expected before the end of July 2013. The acquisition was not included in the June 30 balance sheet.
- Six-month results included an approximately $2.6 million insurance recovery related to a previously disposed operation. The quarter included $1.4 million of transaction costs related to the pending acquisition and a $2.4 million reversal of contingent consideration accruals.
- Liquidity risks include working-capital requirements, customer collection risk, variable-rate debt, limitations under the revolving credit facility, and potential changes in access to surety bonds. Estimated exposure under surety bonds, assuming defaults on existing contractual obligations, was approximately $0.9 billion.
- Construction contracts are generally accounted for using percentage-of-completion estimates, creating exposure to project cost overruns, disputed change orders, claims, and revisions to estimated profitability. The company identified no goodwill or intangible-asset impairment through June 30, 2013, but future impairment risk depends on operating performance, forecasts and interest rates.
- Pending government investigations, asbestos-related gasket matters, litigation concerning a project explosion, tax examinations and other claims were disclosed. Management believes these matters will not have a material adverse effect, but some potential losses cannot be estimated with certainty.
Key facts for investors to verify
- Whether the two underperforming southeastern U.S. projects stabilize and whether further losses or margin adjustments are required.
- Progress, purchase-price funding, closing conditions and post-closing performance of the RepconStrickland acquisition.
- Actual costs and cash payments associated with the United Kingdom withdrawal and timing of the projected 2014 return to profitability.
- Conversion of the $3.511 billion backlog into revenue and cash, including cancellations, change orders and project execution risk.
- Accounts-receivable collection, contract billings and operating cash flow, which was negative $52.2 million for the first six months.
- Compliance with revolving-credit covenants, availability after letters of credit, and refinancing plans before the facility’s November 2016 maturity.
- Availability and cost of surety bonds, as well as developments in disclosed litigation, government investigations, tax examinations and contingent liabilities.