EMCOR Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010; filed November 2, 2010. EMCOR provides electrical and mechanical construction and facilities services across the United States, Canada, the United Kingdom and, before its June 2010 divestiture, the Middle East.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $1.277 billion | $1.372 billion | $3.765 billion | $4.189 billion |
| Gross profit | $172.9 million | $205.2 million | $514.4 million | $613.3 million |
| Gross margin | 13.5% | 15.0% | 13.7% | 14.6% |
| Operating income (loss) | $(174.4) million | $67.3 million | $(97.1) million | $206.4 million |
| Operating margin | (13.7)% | 4.9% | (2.6)% | 4.9% |
| Net income (loss) attributable to EMCOR | $(175.6) million | $40.0 million | $(126.7) million | $121.6 million |
| Diluted EPS | $(2.64) | $0.59 | $(1.91) | $1.81 |
- Q3 revenue declined 6.9%; nine-month revenue declined approximately 10.1%.
- Cash and cash equivalents were $641.1 million at September 30, 2010, down from $727.0 million at December 31, 2009.
- Operating cash flow was $(30.6) million for the nine months, compared with $272.2 million provided in the prior-year period. The decline reflected lower operating results, working-capital changes, incentive compensation payments and a $25.9 million one-time U.K. pension contribution.
- Investing activities provided $0.6 million, including proceeds from equity-investment sales; capital expenditures were $14.0 million.
- Financing activities used $49.6 million, including repayment of the term loan, partially offset by revolving-credit borrowings.
- Total debt was $150.4 million at September 30, 2010, consisting primarily of $150.0 million drawn under the new revolving facility. The company had $77.5 million of letters of credit outstanding.
- Backlog was $3.14 billion at September 30, 2010, compared with $3.39 billion a year earlier and $3.15 billion at December 31, 2009.
Material changes versus the prior comparable period
- EMCOR recorded a $226.2 million non-cash impairment charge in Q3, comprising $210.6 million of goodwill and $15.6 million of trade names in the United States facilities services segment. Including a $19.9 million trade-name charge in Q2, nine-month impairment expense was $246.1 million.
- The impairment resulted from lower forecast revenue and operating margins, particularly in businesses exposed to oil and petrochemical markets. Management revised near-term recovery assumptions, growth rates, margins and terminal-value assumptions.
- Revenue declined across most construction and international businesses. U.S. facilities-services revenue increased modestly in Q3 due to acquisitions and stronger government site-based work, but declined for the nine-month period because of weakness in industrial and mobile mechanical services.
- Canada reported a $4.6 million Q3 operating loss versus $4.5 million of operating income in the prior-year quarter, primarily due to a significant project write-down.
- Gross margin decreased by 150 basis points in Q3 and 90 basis points for the nine-month period, reflecting lower margins in Canada, U.S. electrical construction and industrial services.
- SG&A declined to $119.5 million in Q3 and $363.0 million for the nine months, primarily because of lower employee costs, incentive compensation and doubtful-account provisions.
- EMCOR replaced its prior credit facility in February 2010 with a $550 million revolving facility expiring February 2013, with capacity potentially expandable to $650 million. It used the facility and cash to repay the term loan.
- EMCOR sold its Middle East venture for $7.9 million in June and recognized a corresponding pretax gain. It also recognized a $4.5 million pretax gain from the sale of another equity investment.
Outlook, risks and unusual items
Management described continued uncertainty in private nonresidential construction and refinery markets and tempered expectations for a near-term recovery in U.S. facilities services. The filing does not provide quantitative earnings or revenue guidance. Management stated that cash balances, available revolver capacity and expected operating cash flow should be sufficient for foreseeable liquidity needs, but noted that macroeconomic weakness could adversely affect liquidity.
- The revolving facility is secured by substantially all of EMCOR’s assets and contains financial-ratio and other restrictive covenants. The filing states that the impairment charges did not affect covenant compliance or cash flow.
- Construction contracts are accounted for using percentage-of-completion estimates. Project cost forecasts, claims, change orders, receivables and contract billings could require future adjustments.
- Surety-bond exposure was approximately $1.2 billion based on estimated exposure assuming defaults on all covered contractual obligations. Reduced surety capacity or more restrictive terms could materially affect operations and liquidity.
- The company disclosed lawsuits and other proceedings seeking amounts ranging from a few thousand dollars to more than $60 million; the filing does not quantify probable losses.
- Commodity prices, fuel costs, foreign exchange, customer collectibility and interest rates remain relevant risks. A 50-basis-point change in rates was estimated to affect next-twelve-month net-of-tax interest expense by approximately $0.5 million.
- The U.K. defined-benefit plan was curtailed and replaced with a defined-contribution plan. The company contributed $31.4 million during the first nine months and expected to contribute another $1.4 million during the remainder of 2010.
- A subsidiary received mine-safety citations following a workplace accident that resulted in an employee death. The citations were abated, and no civil penalties had been proposed as of the filing.
- On October 8, 2010, EMCOR acquired a government-infrastructure contractor for an immaterial amount, subject to purchase-price contingencies.
Important facts for investors to verify
- Whether U.S. facilities-services revenue, margins and cash generation recover, particularly in oil, petrochemical and industrial markets.
- The sensitivity of remaining goodwill and trade names to further forecast reductions; EMCOR stated that additional impairment charges could occur.
- Backlog conversion, new contract awards and project-level profitability, especially in U.S. electrical, mechanical and Canadian operations.
- Compliance with revolving-credit covenants and the company’s ability to refinance or repay the $150 million revolver before or at its February 2013 maturity.
- Resolution and potential financial exposure from disclosed litigation, surety obligations, contract claims, project write-downs and mine-safety matters.
- Working-capital trends, operating cash flow and funding requirements for pension, insurance and other long-term obligations.