Business Context and Reporting Period
EMCOR Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company provides electrical and mechanical construction, facilities, building, and industrial services through approximately 70 operating subsidiaries and joint ventures in the United States and United Kingdom. United Kingdom construction operations were discontinued in 2014 and are reported as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 |
|---|---|---|---|---|
| Revenue | $1.699 billion | $1.567 billion | $4.941 billion | $4.710 billion |
| Gross profit | $235.4 million | $222.2 million | $691.9 million | $658.7 million |
| Gross margin | 13.9% | 14.2% | 14.0% | 14.0% |
| Operating income | $70.0 million | $73.6 million | $203.0 million | $215.4 million |
| Operating margin | 4.1% | 4.7% | 4.1% | 4.6% |
| Net income attributable to EMCOR | $41.5 million | $45.0 million | $121.2 million | $126.2 million |
| Diluted EPS from continuing operations | $0.66 | $0.68 | $1.92 | $1.92 |
| Diluted EPS including discontinued operations | $0.66 | $0.67 | $1.91 | $1.86 |
- Cash flow from operations was $95.6 million for the first nine months of 2015, compared with $109.0 million in the prior-year period.
- Capital expenditures were $22.9 million; cash used in investing activities was $22.3 million.
- Cash used in financing activities was $58.7 million, including $13.1 million of long-term debt repayments, $15.1 million of dividends, and $21.1 million of share repurchases.
- Cash and cash equivalents increased to $445.4 million from $432.1 million at December 31, 2014.
- Total debt was $321.8 million, including $319.4 million outstanding under the term loan. No revolving-credit borrowings were outstanding.
- The company had approximately $95.0 million of letters of credit outstanding and a $750.0 million revolving credit facility expiring November 25, 2018.
- Backlog was $3.765 billion at September 30, 2015, compared with $3.634 billion at December 31, 2014 and $3.695 billion at September 30, 2014.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 8.5%; nine-month revenue increased 4.9%. Growth occurred across all reportable segments, led by United States industrial services.
- Third-quarter operating income declined despite higher revenue, primarily because the 2014 period included an $11.7 million gain on the sale of a building. Excluding that unusual gain, the comparison was more favorable.
- Third-quarter gross margin decreased to 13.9% from 14.2%, primarily because of competitive pricing pressure in industrial shop services and lower margins on certain mechanical construction projects.
- Nine-month operating income and operating margin also declined, largely because of the prior-year building-sale gain and a $4.8 million favorable United Kingdom contract-cost adjustment recorded in the second quarter of 2014.
- United States industrial services revenue increased $69.5 million in the quarter and $118.2 million year to date, driven by large capital and maintenance projects. Results were partly offset by lower shop-service pricing and the effects of a refinery labor strike.
- United States electrical construction operating income increased to $25.5 million from $20.7 million in the quarter; mechanical construction operating income decreased to $26.9 million from $30.2 million.
- United States building services operating income decreased by $3.4 million in the quarter, while nine-month operating income increased by $1.3 million. The quarter was affected by the completion of two large government site-based joint-venture projects.
- United Kingdom building services revenue rose, but unfavorable foreign-exchange rates reduced nine-month revenue by approximately $24.7 million and operating income by approximately $0.8 million.
- Accounts receivable increased to $1.334 billion from $1.234 billion at year-end, contributing to lower operating cash flow. Net over-billings were $260.9 million versus $265.4 million at December 31, 2014.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide specific earnings or revenue guidance. Management states that current cash, operating cash generation, and available borrowing capacity should be sufficient for foreseeable liquidity and capital-expenditure needs.
- Management expects quarterly dividends of $0.08 per share to continue for the foreseeable future, subject to credit-agreement limitations.
- On October 28, 2015, the board authorized an additional $200 million of share repurchases. Approximately $143.5 million remained available under prior authorizations at September 30, 2015.
- Material risks include macroeconomic weakness, reduced nonresidential construction demand, customer credit and collection risk, project-estimate revisions, commodity and fuel-price increases, variable-rate debt, foreign-exchange movements, and availability of surety bonds.
- Surety-bond exposure, based on estimated exposure assuming defaults on existing bonded obligations, was approximately $1.2 billion. Management believes bonding capacity is currently adequate but warns that reduced availability could materially affect results and liquidity.
- Significant contingencies include government-contract audits, litigation related to a construction-project explosion, and a California janitorial-services class action. The latter was subject to a proposed $2.3 million settlement, which had been accrued, with court approval pending.
- Remaining discontinued-operation liabilities primarily relate to United Kingdom construction obligations; approximately $0.9 million of employee-severance and facility-termination obligations remained at September 30, 2015.
- A June 2015 acquisition of a mechanical-construction company was immaterial. An additional immaterial fire-protection acquisition occurred in October 2015.
- No goodwill or identifiable-intangible-asset impairment was recognized through the first nine months. The October 1, 2015 impairment testing had not yet been completed at the filing date, and management identified United States industrial services as particularly sensitive to oil-and-gas market conditions.
- The company was in compliance with all credit-agreement covenants at September 30, 2015. A 25-basis-point increase in interest rates was estimated to increase after-tax interest expense by approximately $0.5 million over the next twelve months.
Important Facts for Investors to Verify
- Whether revenue growth, backlog conversion, and industrial-services demand persist after the refinery strike and amid oil-price volatility.
- Whether gross-margin pressure in industrial shop services and mechanical construction continues.
- Accounts-receivable collection, contract billing positions, and operating cash-flow conversion.
- Completion and outcome of the October 1, 2015 goodwill impairment testing, particularly for industrial services.
- Status and ultimate cost of the California class-action settlement, construction-project arbitration, and other litigation.
- Availability of surety bonds and compliance with debt covenants as share repurchases, dividends, and acquisitions continue.
- Impact of variable interest rates, foreign-exchange movements, commodity prices, and fixed-price contracts on future profitability.