EMCOR Group, Inc. — Q1 2011 Form 10-Q Summary
Business Context and Reporting Period
EMCOR provides electrical and mechanical construction, facilities services, and related maintenance services through operations in the United States, Canada, and the United Kingdom. This unaudited Form 10-Q covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010. The company reported approximately $3.57 billion of backlog at March 31, 2011, compared with $3.29 billion at March 31, 2010 and $3.42 billion at December 31, 2010.
Financial Results and Key Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $1.312 billion | $1.212 billion | Up 8.3% |
| Gross profit | $163.0 million | $165.1 million | Down $2.1 million |
| Gross margin | 12.4% | 13.6% | Down 120 basis points |
| Operating income | $42.3 million | $42.3 million | Essentially unchanged |
| Operating margin | 3.2% | 3.5% | Down 30 basis points |
| Net income attributable to EMCOR | $24.6 million | $21.8 million | Up 12.7% |
| Diluted EPS | $0.36 | $0.32 | Up $0.04 |
| Cash flow from operations | $(36.4) million | $(73.1) million | Improved by $36.7 million |
Cash and cash equivalents were $632.0 million at March 31, 2011, down from $710.8 million at December 31, 2010. Total assets were $2.750 billion, compared with $2.756 billion at year-end 2010. Total equity increased to $1.194 billion from $1.163 billion.
Debt consisted primarily of $150.0 million outstanding under the revolving credit facility and $1.9 million of capitalized lease obligations. The company had no current borrowings under the facility, while approximately $89.3 million of letters of credit were outstanding. The $550 million revolving credit facility expires in February 2013 and permits an increase to $650 million subject to additional lender commitments.
Cash flow from operations was negative primarily because of working-capital changes, including lower accounts payable, changes in contract-in-progress accounts, and payment of incentive compensation. Investing cash flow was $(46.8) million, principally reflecting $42.4 million of acquisition-related payments and $4.5 million of capital expenditures. Financing cash flow was $1.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by United States facilities services, which increased to $449.5 million from $346.8 million, including contributions from acquisitions and stronger mobile mechanical and industrial services demand.
- United States electrical construction and facilities services revenue increased to $268.5 million from $260.3 million, while operating income increased to $14.4 million from $9.2 million.
- United States mechanical construction and facilities services revenue increased modestly to $422.3 million from $412.7 million, but operating income declined to $23.3 million from $24.8 million because of lower margins on industrial and commercial work.
- Canada construction revenue declined to $47.0 million from $78.3 million, and operating income fell to $0.5 million from $3.3 million, primarily because a significant prior-year industrial project did not recur.
- United Kingdom construction and facilities services revenue increased to $124.9 million from $114.1 million, while operating income decreased to $2.6 million from $3.2 million.
- Gross profit and margins declined partly because Q1 2010 included a $4.5 million pretax gain from the sale of an equity investment and favorable resolutions of certain project uncertainties.
- SG&A expense decreased to $119.7 million from $122.8 million, and SG&A as a percentage of revenue decreased to 9.1% from 10.1%.
- Net income benefited from a lower effective tax rate, which was 37.5% in Q1 2011 versus 44.5% in Q1 2010, including discrete items.
- EMCOR completed one immaterial acquisition during the quarter. Acquisitions completed in 2011 and 2010 contributed approximately $65.1 million of Q1 2011 revenue.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide specific quantitative earnings or revenue guidance. Management stated that the business remained profitable in an uncertain and difficult economic environment but continued to face marketplace margin pressure. Customers remained reluctant to commit capital expenditures, and competition for construction projects was intense. Management emphasized selectivity in bidding and stated that facilities services provides a more predictable cash-flow stream than construction activities.
- Key operating risks include weakness in non-residential construction demand, customer deferrals, project execution risk, contract margin erosion, commodity and energy cost inflation, and customer collectibility.
- Construction accounting relies on percentage-of-completion estimates. Changes in estimated costs, claims, change orders, or project profitability could materially affect reported results.
- Surety bond availability remains important. Aggregate estimated exposure under contracts covered by surety bonds was approximately $1.4 billion, assuming defaults on all then-existing contractual obligations. Reduced bonding capacity could adversely affect bidding and operations.
- The revolving credit facility is secured by substantially all company assets and contains financial and operating covenants. Variable-rate debt creates interest-rate exposure; a 25-basis-point increase was estimated to increase after-tax interest expense by approximately $0.2 million over the next twelve months.
- Total contractual obligations were approximately $1.491 billion, including $891.2 million of open purchase obligations, $228.8 million of other long-term obligations, and $201.2 million of operating leases. Open purchase obligations are expected to be recovered through customer billings.
- A $1.0 million restructuring charge was recorded, primarily for employee severance, with approximately $0.6 million remaining to be paid during 2011.
- The company settled the longstanding Mowlem arbitration matter on March 31, 2011. The parties discontinued related proceedings and executed mutual releases; the filing does not state a settlement payment amount.
- No goodwill or trade-name impairment was recognized in Q1 2011. Goodwill totaled $426.7 million and identifiable intangible assets totaled $259.4 million at March 31, 2011. Future impairment charges remain possible if operating assumptions deteriorate.
- The company believes current cash, available borrowing capacity, and expected operating cash flow will be sufficient for short-term and foreseeable long-term liquidity needs, although the filing cautions that macroeconomic conditions could adversely affect liquidity.
Most Important Facts for Investors to Verify
- Whether revenue growth converts into improved margins, given the decline in gross and operating margins.
- The sustainability and quality of the $3.57 billion backlog, including the portion attributable to acquisitions versus organic awards.
- Operating cash-flow conversion and working-capital trends, particularly accounts receivable, contract balances, and billings.
- Progress in Canada and United Kingdom operations, where Q1 operating income declined.
- Availability and covenant headroom under the $550 million revolving credit facility before its February 2013 expiration.
- Exposure to surety bond capacity, letters of credit, project claims, and customer credit deterioration.
- Future goodwill and intangible-asset impairment risk, especially in the United States facilities services segment.
- The financial terms and accounting effects, if any, of the Mowlem settlement, which are not clearly quantified in the filing.