EME

EMCOR Group, Inc. - 10-Q Summary (Period Ended June 30, 2007)

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2007. EMCOR Group, Inc. is a leading provider of mechanical and electrical construction and facilities services in the United States, Canada, the United Kingdom, and the Middle East. The company operates through six reportable segments. Notably, the company effected a 2-for-1 stock split on July 9, 2007, and all share and per-share data in this report have been adjusted retroactively to reflect this split.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 15.2% for the quarter and 14.9% for the six-month period compared to 2006. Growth was driven by increased commercial, hospitality, and high-tech construction projects in the U.S., the impact of an October 2006 acquisition, and increased facilities services contracts.
• Profitability: Operating income rose 74.3% for the quarter and 67.5% for the six-month period. Gross profit margins improved to 12.1% (Q2) and 11.1% (YTD) from 10.9% and 10.5% in the prior year, reflecting a shift toward higher-margin work.
• Segment Performance:
  • U.S. Mechanical: Significant revenue and operating income growth due to the acquisition and strong market demand.
  • U.S. Facilities: Revenue and income growth driven by site-based contracts and mobile services.
  • Canada: Operating loss of $0.4 million for the six months (vs. income of $2.8 million in 2006) due to delays in oil and gas projects and fewer industrial outage bids.
  • U.K.: Operating loss of $1.8 million for the six months (vs. income of $5.4 million in 2006) due to lower gross profit on rail projects and increased pension costs.
• Restructuring: Incurred $0.1 million in restructuring expenses for the six months ended June 30, 2007, primarily for employee severance. No restructuring expenses were recorded in the comparable 2006 period.

Outlook, Risks, and Management Commentary

• Management Commentary: Management reported record revenues, net income, and diluted EPS for a second quarter. The company continues to benefit from a strong U.S. non-residential construction market. Net over-billings increased to $370.7 million, providing a liquidity buffer.
• Liquidity: Cash and cash equivalents increased by $62.6 million during the first half of 2007. The company has a $375 million revolving credit facility with no borrowings outstanding as of June 30, 2007. Letters of credit outstanding were $60.6 million.
• Risks and Contingencies:
  • Surety Bonds: The company faces potential risk if surety bond availability decreases due to industry consolidation. Aggregate estimated exposure on existing bonds is approximately $1.2 billion.
  • Legal Proceedings: A subsidiary settled two civil anti-trust actions in July 2007. The settlement amount was not material to financial results.
  • Market Risk: Exposure to fluctuations in commodity prices (copper, steel) and energy prices. Foreign currency translation impacts are recorded in equity.
  • Acquisitions: Subsequent to the period end, the company purchased three companies for approximately $33.5 million in cash.

Investor Verification Checklist

• Stock Split Adjustment: Verify that all historical share counts and EPS figures are adjusted for the 2-for-1 split effective July 9, 2007.
• U.K. Pension Costs: Review the impact of the defined benefit pension plan in the U.K. on operating margins, as costs increased significantly in 2007.
• Canada Segment Volatility: Monitor the Canada segment's ability to secure oil and gas contracts, as delays contributed to an operating loss in the first half of 2007.
• Surety Bond Capacity: Assess the company's ability to maintain access to surety bonds given the $1.2 billion exposure and industry consolidation trends.
• Acquisition Integration: Evaluate the performance of the U.S. mechanical construction company acquired in October 2006, which contributed significantly to revenue growth.