EMCOR Group, Inc. — 2019 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. The filing is unaudited. EMCOR provides electrical and mechanical construction, building services, and industrial services, primarily in the United States, with additional United Kingdom building-services operations.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $2.288 billion | $2.047 billion | $6.771 billion | $5.901 billion |
| Gross profit | $336.0 million | $309.3 million | $991.1 million | $869.3 million |
| Gross margin | 14.7% | 15.1% | 14.6% | 14.7% |
| Operating income | $115.7 million | $111.8 million | $338.0 million | $289.4 million |
| Operating margin | 5.1% | 5.5% | 5.0% | 4.9% |
| Net income attributable to EMCOR | $81.8 million | $79.4 million | $238.2 million | $205.6 million |
| Diluted EPS from continuing operations | $1.45 | $1.36 | $4.22 | $3.52 |
| Cash flow from operations | Not separately provided | Not separately provided | $176.9 million | $65.9 million |
Third-quarter revenue increased 11.8%, operating income increased approximately 3.6%, and net income attributable to EMCOR increased approximately 3.1%. For the first nine months, revenue increased 14.7%, operating income increased approximately 16.8%, and net income increased approximately 15.9%.
- SG&A was $220.1 million in the quarter and $652.5 million year to date; SG&A margin was 9.6% in both periods.
- Cash, cash equivalents, and restricted cash totaled $369.8 million at September 30, 2019, compared with $366.2 million at December 31, 2018.
- Debt totaled $266.0 million, including a $258.2 million term loan; the company had no revolver borrowings at quarter-end. Excluding lease liabilities, EMCOR had approximately $102.0 million of net cash.
- The company reported $1.927 billion of accounts receivable, $179.0 million of current contract assets, and $566.0 million of current contract liabilities.
- Remaining performance obligations were $4.035 billion, with $3.456 billion expected to be recognized within one year.
Material Changes Versus Prior Comparable Period
- Revenue growth occurred across all reportable segments except United Kingdom building services in the third quarter. U.S. mechanical construction revenue increased to $869.2 million from $759.5 million, and U.S. building services revenue increased to $532.1 million from $473.7 million.
- U.S. industrial services revenue increased only modestly in the quarter, to $234.2 million from $227.3 million, and segment operating income declined to $5.6 million from $7.6 million due to a less favorable mix containing more lower-margin capital projects. Year-to-date industrial-services operating income improved substantially, partly due to stronger demand and a $3.6 million legal settlement recovery.
- Quarterly consolidated operating margin declined to 5.1% from 5.5%, primarily because of lower margins in domestic construction and industrial services and a less favorable revenue mix. The 2018 quarter benefited from $6.3 million of final contract settlements on two completed projects.
- Year-to-date operating margin improved to 5.0% from 4.9%. The 2018 period included a $0.9 million intangible-asset impairment charge and $5.5 million of losses from revised cost estimates on a transportation project; no comparable significant losses were recorded in 2019.
- Operating cash flow rose by $111.0 million year over year, primarily due to higher earnings and the timing of customer receipts and advance billings.
- Investing cash outflows increased to $115.0 million from $56.9 million, reflecting $80.0 million of acquisition payments and $35.8 million of capital expenditures.
- Five companies were acquired during the first nine months for total consideration of $83.6 million. On October 4, 2019, EMCOR agreed to acquire Batchelor & Kimball, Inc. in an all-cash transaction, subject to customary closing conditions and regulatory approvals.
Liquidity, Debt, Outlook, and Risks
- EMCOR had a $900.0 million revolving credit facility and a $400.0 million term loan, both under an agreement expiring August 3, 2021. Approximately $109.0 million of letters of credit were outstanding, primarily supporting insurance obligations. The company was in compliance with all debt covenants.
- The term loan carried an interest rate of 3.04% at September 30, 2019. Management estimated that a 100-basis-point increase in interest rates would increase after-tax interest expense by approximately $1.9 million over the next twelve months.
- Management stated that cash balances, operating cash flow, available revolver capacity, and other financing sources should be sufficient for foreseeable liquidity needs and capital expenditures. No quantified earnings or revenue guidance was provided in the filing.
- Key risks include demand for non-residential construction and industrial services, economic conditions, customer credit and collection risk, cost overruns and estimates on fixed-price contracts, commodity and fuel costs, foreign-exchange movements, and availability of surety bonds.
- Surety-bond exposure, based on project completion percentages, was approximately $1.2 billion assuming defaults on all covered contractual obligations. A reduction in bonding capacity could materially affect bidding, liquidity, and results.
- Legal proceedings and government audits or investigations are ongoing. Management does not currently expect a material adverse effect, but acknowledges that litigation outcomes cannot be predicted with assurance.
- Adoption of ASC 842 on January 1, 2019 added approximately $233.0 million of operating lease right-of-use assets and $245.1 million of operating lease liabilities at September 30, 2019. Management stated that adoption did not affect liquidity, results of operations, or debt-covenant compliance.
- Critical estimates include percentage-of-completion revenue recognition, collectibility of receivables, insurance liabilities, income taxes, goodwill, and identifiable intangible assets. No goodwill impairment was recorded in the periods presented.
Most Important Facts for Investors to Verify
- Whether revenue growth and the $4.04 billion backlog convert into cash flow without deterioration in contract margins or working-capital requirements.
- The sustainability of quarterly operating margins, particularly in U.S. electrical and mechanical construction and U.S. industrial services.
- The integration, valuation, and contribution of the 2019 acquisitions and the expected Batchelor & Kimball acquisition.
- Customer collections, contract assets, pending change orders, claims, and potential cost-to-complete revisions under ASC 606.
- Surety-bond availability and the company’s approximately $1.2 billion estimated exposure under bonded contracts.
- Debt refinancing requirements before the August 2021 credit-agreement maturity, including exposure to variable interest rates and LIBOR transition.
- Potential effects of litigation, government investigations, insurance claims, commodity costs, fuel prices, and United Kingdom foreign-exchange movements.