EMCOR Group, Inc. — Fiscal 2012 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2012, filed February 26, 2013. EMCOR provides electrical and mechanical construction, renovation and retrofit, and facilities services through approximately 70 operating subsidiaries and joint ventures in the United States and United Kingdom. It employed more than 26,000 people at year-end; approximately 92% of 2012 revenue was generated in the United States and 8% in the United Kingdom.
Revenue mix was approximately 39% new construction, 17% renovation and retrofit, and 44% facilities services. The company reported quarterly fourth-quarter 2012 revenue of $1.612 billion and net income attributable to EMCOR of $46.4 million.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $6.347 billion | $5.613 billion | +13.1% |
| Gross profit | $806.4 million | $733.9 million | +9.9% |
| Gross margin | 12.7% | 13.1% | Down 40 bps |
| Operating income | $250.0 million | $210.8 million | +18.6% |
| Operating margin | 3.9% | 3.8% | Up 10 bps |
| Income from continuing operations | $148.9 million | $124.6 million | +19.5% |
| Net income attributable to EMCOR | $146.6 million | $130.8 million | +12.0% |
| Diluted EPS from continuing operations | $2.16 | $1.78 | +21.3% |
| Cash flow from operating activities | $184.4 million | $149.4 million | +23.4% |
Year-end cash and cash equivalents were $605.3 million versus $511.3 million in 2011. Total assets were $3.107 billion and total equity was $1.357 billion. Accounts receivable were $1.222 billion, including an $11.5 million allowance for doubtful accounts.
Debt consisted primarily of $150.0 million outstanding under the $750.0 million revolving credit facility, which expires in November 2016 and permits expansion to $900.0 million subject to additional lender commitments. Capital lease and other debt brought total debt and capital lease obligations to $155.9 million. Approximately $84.0 million of letters of credit were outstanding.
Capital expenditures were $37.9 million. Net cash used in investing activities was $42.5 million, while net cash used in financing activities was $50.6 million, including $34.1 million of dividends and $23.9 million of share repurchases.
Material changes versus the prior comparable period
- Revenue increased across all operating segments, with approximately $303.9 million of incremental revenue from companies acquired in 2012 and 2011.
- U.S. mechanical construction and facilities services revenue increased to $2.296 billion from $1.917 billion; U.S. facilities services revenue increased to $2.300 billion from $2.012 billion.
- U.S. electrical construction and facilities services operating income increased to $100.7 million from $84.6 million; U.S. facilities services operating income increased to $82.3 million from $69.1 million.
- U.S. mechanical construction operating income increased to $123.5 million from $116.0 million, but its margin declined to 5.4% from 6.0%.
- United Kingdom operating income declined to $7.1 million from $9.2 million because of losses on several construction projects and unfavorable currency effects.
- Gross margin declined primarily because of lower margins in U.S. mechanical construction, U.S. facilities services and the United Kingdom. The company attributed part of the prior-year comparison to favorable project resolutions and claim settlements in 2011.
- Selling, general and administrative expense increased to $556.2 million from $518.1 million, but declined as a percentage of revenue to 8.8% from 9.2%.
- No goodwill or identifiable intangible asset impairment was recorded in 2012, compared with a $3.8 million impairment charge in 2011 and $246.1 million in 2010.
- Backlog increased modestly to $3.37 billion from $3.33 billion. Backlog excluding acquisitions increased as domestic contract awards rose, partly offset by lower United Kingdom backlog.
- The company acquired one mechanical construction company in 2012 for an immaterial amount. It repurchased approximately 0.9 million shares during 2012 and had approximately $48.6 million remaining under its $100 million authorization.
- The board declared a $0.25 per-share special dividend and increased the regular quarterly dividend to $0.06 per share; total dividends declared per share in 2012 were $0.51.
Guidance, outlook, risks and unusual items
Management described its outlook as cautiously optimistic, citing improved revenue, operating income and operating margin, strong execution on large projects, and increased demand in industrial and oil and gas markets. Management also emphasized that the bidding environment remained highly competitive, with some bidders accepting extremely low margins. No specific numerical earnings or revenue guidance was provided in the filing.
- Demand remains exposed to cyclical non-residential construction, customer access to credit, project delays or cancellations, and government budget constraints, including potential sequestration and reduced public-sector spending.
- Fixed-price contracts expose the company to labor, material, fuel, productivity, project execution and change-order risks. Copper, steel and gasoline costs may reduce margins where increases cannot be recovered.
- Percentage-of-completion accounting requires estimates of total contract costs and revenues. Revisions, claims, unapproved change orders or estimated contract losses could materially affect reported results and cash flow.
- Surety bonds are important to the construction business. Estimated exposure based on defaults on all bonded contractual obligations was approximately $0.9 billion, and reduced bonding capacity could limit bidding or project execution.
- Approximately 58% of employees were covered by more than 375 collective bargaining agreements. The company contributes to more than 200 multiemployer pension plans and cannot determine the amount or timing of potential future withdrawal liabilities.
- The United Kingdom defined-benefit pension plan was underfunded by $62.7 million at year-end 2012; approximately $5.7 million of contributions were expected in 2013.
- The company is effectively self-insured for substantial claims exposure, including workers’ compensation, automobile, general liability and health-care claims. Insurance reserves and claims outcomes could vary materially from estimates.
- Goodwill was $566.6 million, with approximately 63.8% allocated to U.S. facilities services. Future impairment risk depends on operating performance, forecast growth, margins, interest rates and other valuation assumptions.
- Material contingencies include government audits and investigations, litigation, an asbestos-related gasket matter, and claims associated with a construction-site explosion. Management did not expect these matters to have a material adverse effect, but certain losses could not be estimated with certainty.
Important facts investors should verify
- Whether backlog converts into profitable revenue, particularly given cancellation provisions, project delays and the competitive bidding environment.
- Whether gross margins stabilize or continue to decline, especially in U.S. mechanical construction, U.S. facilities services and United Kingdom construction.
- Customer receivable collectibility, contract claims, unapproved change orders, retainage and the sustainability of the net over-billed position of $290.5 million.
- Compliance with revolving-credit covenants and the availability of borrowing capacity after considering $150.0 million of borrowings and approximately $84.0 million of letters of credit.
- Potential multiemployer pension withdrawal liabilities, required contribution increases and the funding status of the United Kingdom pension plan.
- Future goodwill or intangible-asset impairment, particularly if facilities-services performance or forecast assumptions weaken.
- Exposure to surety-bond capacity, fixed-price contract losses, government contract actions, litigation and self-insured claims.
- The sustainability of dividends and share repurchases relative to operating cash flow, contractual obligations and credit-facility restrictions.