EMCOR Group, Inc. annual report, FY2015

EMCOR Group, Inc. 2015 Form 10-K Summary

Business context and reporting period

EMCOR Group, Inc. filed its Form 10-K for the fiscal year ended December 31, 2015. The company provides electrical and mechanical construction, building services and industrial services through approximately 70 operating subsidiaries and joint ventures. It employed approximately 29,000 people, with approximately 56% represented by unions. Approximately 94% of 2015 revenue was generated in the United States and 6% in foreign countries, principally the United Kingdom.

The filing presents the United Kingdom construction business as discontinued operations following the company’s withdrawal from that market; remaining United Kingdom operations principally provide building services.

Financial performance and key metrics

Metric	2015	2014	Change
Revenue	$6.719 billion	$6.425 billion	Up 4.6%
Gross profit	$944.5 million	$907.2 million	Up 4.1%
Gross margin	14.1%	14.1%	Flat
Operating income	$287.1 million	$289.9 million	Down 1.0%
Operating margin	4.3%	4.5%	Down 0.2 points
Income from continuing operations	$172.6 million	$178.1 million	Down 3.1%
Net income attributable to EMCOR	$172.3 million	$168.7 million	Up 2.1%
Diluted EPS from continuing operations	$2.72	$2.59	Up 5.0%
Cash flow from operations	$266.7 million	$246.7 million	Up 8.1%

Fourth-quarter 2015 revenue was $1.778 billion, gross profit was $252.6 million and net income attributable to EMCOR was $51.1 million. Fourth-quarter diluted EPS from continuing operations was $0.80.

United States mechanical construction and facilities services revenue increased to $2.313 billion from $2.201 billion; operating income increased to $138.7 million from $114.4 million.
United States electrical construction and facilities services revenue increased to $1.367 billion from $1.312 billion, but operating income declined to $82.2 million from $90.9 million.
United States building services revenue increased modestly to $1.739 billion; operating income increased to $70.5 million from $65.9 million.
United States industrial services revenue increased to $922.1 million, while operating income declined to $56.5 million from $63.2 million.
United Kingdom building services revenue increased to $377.5 million, while operating income declined to $11.6 million from $15.0 million, including a $0.9 million unfavorable foreign exchange impact.

Cash flow, liquidity and debt

Cash and cash equivalents increased to $486.8 million from $432.1 million.
Operating cash flow was $266.7 million; investing cash flow used $59.8 million, including $28.2 million for acquisitions and $35.5 million for capital expenditures; financing activities used $149.5 million.
Accounts receivable increased to $1.360 billion from $1.234 billion. Net over-billings increased to $311.5 million from $265.4 million.
The company had $315.0 million outstanding under its term loan, down from $332.5 million, and no borrowings under its $750 million revolving credit facility.
Letters of credit outstanding were approximately $99.0 million, including approximately $97.8 million supporting insurance obligations.
The term loan and revolving facility mature or expire in November 2018 and bear variable interest; the rate in effect at year-end was 1.67%.
EMCOR reported compliance with all credit agreement covenants at December 31, 2015. Management stated that cash, operating cash flow and available borrowing capacity should meet foreseeable liquidity needs.
Contractual obligations totaled approximately $1.963 billion, including $329.4 million for the term loan with interest, $239.6 million for operating leases and $1.021 billion of open purchase obligations.

Material changes versus the prior comparable period

Revenue grew across all reportable segments, led by domestic construction, industrial field services and mobile mechanical services.
Gross profit increased, but consolidated operating income declined because 2014 included an $11.7 million gain on the sale of a building. Excluding that gain and the 2014 $1.5 million intangible impairment charge, 2015 operating performance improved, according to management.
2015 operating results included $12.1 million of revenue from settlement of a claim on a southeastern institutional project.
Electrical construction results were pressured by approximately $10.1 million of losses on transportation projects caused by productivity issues and delays.
Industrial services results were negatively affected by a nationwide refinery-worker strike, deferred or lost turnaround work, lower heat-exchanger demand and competitive pressure on shop-service billing rates and margins.
Backlog increased to $3.771 billion from $3.634 billion. Management estimated that 79% of year-end 2015 backlog would convert to revenue during 2016.
The company repurchased approximately 2.3 million shares for $112.3 million during 2015 and retained approximately $254.1 million of repurchase authorization. The quarterly dividend was $0.08 per share.
Three immaterial acquisitions were completed during 2015. Two contributed $12.5 million of incremental revenue and less than $0.1 million of operating income, net of amortization.

Guidance, outlook, risks and unusual items

The filing does not provide a formal numerical revenue, earnings or margin forecast. Management expressed confidence in available liquidity and expected cash flow to fund operations, capital expenditures and foreseeable obligations.

Key demand risks include cyclical non-residential construction, customer project cancellations or delays, credit availability and government budget constraints.
Fixed-price contracts expose the company to labor, material, fuel, productivity, schedule and project-estimate risk.
Oil-price volatility may reduce refinery and petrochemical customers’ maintenance and capital spending, affecting industrial services.
Approximately $1.2 billion of surety-bond exposure was outstanding based on the percentage of completion of bonded projects, or approximately 32% of backlog.
The company participates in more than 200 multiemployer pension plans. Potential withdrawal liabilities cannot be reasonably estimated and could be material.
The United Kingdom defined-benefit plan was underfunded by $32.3 million at year-end; expected 2016 contributions were approximately $5.4 million.
Goodwill totaled $843.2 million and net identifiable intangible assets totaled $472.8 million. No goodwill or intangible impairment was recorded in 2015, but the industrial services segment had comparatively limited valuation cushion in impairment testing.
USM settled a California janitorial-services class action after year-end approval of a consent decree. The settlement required $1.0 million for class-related relief and $1.3 million for legal fees and costs; the amounts had been accrued by December 31, 2014.
The company is subject to other litigation, government audits, environmental obligations, self-insured claims and contractual guarantees. Management does not currently expect these matters to have a material adverse effect, but litigation outcomes are not predictable.
Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.

Important facts for investors to verify

Whether transportation-project losses and industrial-services weakness persist into 2016.
Conversion, cancellation and margin quality of the $3.771 billion backlog, especially the 79% expected 2016 conversion.
Collection of the increased accounts receivable balance, retainage and contract assets, including claims and unapproved change orders.
Term-loan repayment and refinancing requirements before the November 2018 maturity.
Potential exposure from multiemployer pension plans, surety bonds, self-insured claims and pending litigation.
Valuation sensitivity of the industrial services goodwill balance to lower forecasts, higher interest rates or continued oil-market weakness.
Future cash deployment among share repurchases, dividends, acquisitions and debt reduction.