EMCOR Group, Inc. — 2018 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
EMCOR provides electrical and mechanical construction, facilities, building, and industrial services through approximately 75 operating subsidiaries and joint ventures in the United States and United Kingdom. This filing covers the three and nine months ended September 30, 2018. The financial statements are unaudited.
The company ceased United Kingdom construction operations in 2014; related residual activity remains classified as discontinued operations.
Key Financial Metrics
| Metric | Three Months 2018 | Three Months 2017 | Nine Months 2018 | Nine Months 2017 |
|---|---|---|---|---|
| Revenue | $2.047 billion | $1.887 billion | $5.901 billion | $5.674 billion |
| Gross profit | $309.3 million | $295.1 million | $869.3 million | $835.9 million |
| Gross margin | 15.1% | 15.6% | 14.7% | 14.7% |
| Operating income | $111.8 million | $106.0 million | $289.4 million | $280.8 million |
| Operating margin | 5.5% | 5.6% | 4.9% | 4.9% |
| Net income attributable to EMCOR | $79.4 million | $64.6 million | $205.6 million | $174.0 million |
| Diluted EPS from continuing operations | $1.36 | $1.09 | $3.52 | $2.93 |
- Third-quarter revenue increased 8.5%; nine-month revenue increased 4.0%.
- Third-quarter net income attributable to EMCOR increased approximately 23%; nine-month net income increased approximately 18%.
- The effective tax rate on continuing operations, inclusive of discrete items, declined to 27.1% from 37.3% in the quarter and to 27.1% from 36.0% for the nine months, primarily because of the Tax Cuts and Jobs Act.
- Net cash provided by operating activities was $65.9 million for the nine months, compared with $238.3 million in 2017.
- Capital expenditures were $28.7 million; acquisition payments were $25.7 million; share repurchases were $90.8 million; and dividends paid were $14.0 million.
- Cash, cash equivalents, and restricted cash declined to $356.3 million at September 30, 2018 from $469.4 million at December 31, 2017.
- Total debt was $299.3 million, including $25.0 million drawn on the revolving facility and $273.4 million under the term loan. The company was in compliance with its credit covenants.
- Remaining performance obligations were $3.97 billion, including $3.20 billion expected to be recognized within one year.
Material Changes Versus Prior Comparable Period
- All reportable segments increased third-quarter revenue. United States industrial services revenue increased 47.2% year over year, partly because the 2017 period was adversely affected by Hurricane Harvey. Nine-month industrial services revenue declined because large turnaround projects were reduced or rescheduled.
- United States building services revenue increased because of higher mobile mechanical, energy services, and government site-based activity. United Kingdom building services benefited from higher project activity and favorable foreign exchange.
- United States electrical construction operating income declined to $34.5 million from $46.6 million in the quarter and to $106.3 million from $109.7 million for the nine months. Results included losses on a Western U.S. transportation project of $4.7 million in the quarter and $5.5 million year to date.
- United States mechanical construction operating income increased modestly, although the 2017 nine-month comparison benefited from an $18.1 million recovery of previously disputed contract costs.
- Gross margin declined in the quarter because of the transportation project loss and a less favorable project mix. SG&A margin improved to 9.6% from 10.0% in the quarter and remained 9.8% for the nine months.
- Operating cash flow decreased substantially because of the timing of customer receipts, including advanced billings on long-term construction contracts, and higher incentive award payments.
- EMCOR adopted ASC 606 on January 1, 2018 using the modified retrospective method. The cumulative after-tax adjustment reduced retained earnings by $0.9 million. The company reported no impact on operating cash flow.
- During the second quarter, the company recorded a $0.9 million non-cash impairment charge for a finite-lived trade name in the United States industrial services segment.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide specific quantitative full-year revenue, earnings, or cash-flow guidance. Management states that current cash, available revolver capacity, financing sources, and expected operating cash flow should be sufficient for foreseeable liquidity needs and capital expenditures.
- Management reported record quarterly revenue, operating income, net income attributable to EMCOR, and diluted continuing-operations EPS in the third quarter.
- Remaining performance obligations increased from $3.67 billion at June 30, 2018 to $3.97 billion at September 30, 2018, driven primarily by domestic construction awards.
- Construction results depend on estimates of total costs, claims, pending change orders, customer collections, and project completion. Revisions can produce cumulative catch-up gains or losses; the transportation project demonstrates this risk.
- Surety bonds are important to contract awards. Estimated exposure based on bonded projects was approximately $1.1 billion, and reduced surety-bond availability could materially affect operations, liquidity, and bidding capacity.
- Primary market risks include demand for non-residential construction and industrial services, economic conditions, interest rates, commodity prices, energy costs, foreign exchange, and customer credit quality. A 100-basis-point increase in interest rates would increase after-tax interest expense by approximately $2.2 million over the next twelve months.
- The company is involved in litigation, including claims related to a 2010 construction-project explosion. Management believes the matters are not expected to have a material adverse effect, but it cannot estimate with certainty any loss from an adverse resolution.
- The company expects to adopt the new lease accounting standard on January 1, 2019. The filing states that the impact was still being quantified.
- EMCOR repurchased 1.26 million shares for approximately $95.6 million during 2018 through September 30. The board subsequently authorized an additional $200 million repurchase authorization.
- In October 2018, EMCOR acquired an electrical construction and maintenance company in North Texas for an immaterial amount.
Most Important Facts for Investors to Verify
- Whether operating cash flow improves from the $65.9 million year-to-date level and whether working-capital timing normalizes.
- Progress, profitability, and final exposure on the Western U.S. transportation project and any additional loss provisions.
- Performance of the United States industrial services segment, including turnaround timing, oil and gas demand, and potential goodwill or intangible-asset impairment.
- Conversion of the $3.97 billion remaining performance obligation balance into revenue and cash, including cancellation and change-order risks.
- Liquidity after share repurchases, dividends, acquisitions, capital expenditures, and required debt repayments.
- The quantified balance-sheet impact of adopting the new lease standard on January 1, 2019.
- Developments in litigation, government audits, surety capacity, customer collectibility, and contract claims.