EMCOR Group, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2013, compared with the three months ended March 31, 2012. The unaudited filing covers EMCOR’s electrical and mechanical construction and facilities services operations in the United States and United Kingdom.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $1.568 billion | $1.539 billion | Up 1.9% |
| Gross profit | $191.1 million | $180.7 million | Up $10.4 million |
| Gross margin | 12.2% | 11.7% | Up 50 basis points |
| Operating income | $51.3 million | $46.2 million | Up 11.0% |
| Operating margin | 3.3% | 3.0% | Up 30 basis points |
| Net income attributable to EMCOR | $30.2 million | $27.1 million | Up 11.1% |
| Diluted EPS | $0.44 | $0.40 | Up $0.04 |
| Cash used in operating activities | $(95.1) million | $(33.1) million | Higher use of cash |
- Cash and liquidity: Cash and cash equivalents were $499.1 million at March 31, 2013, down from $605.3 million at December 31, 2012. The decline primarily reflected working-capital requirements, including changes in receivables and contract balances.
- Debt: Total debt was approximately $155.4 million, including $150.0 million drawn under the revolving credit facility. The facility provides $750.0 million of commitments, expires November 21, 2016, and had approximately $88.0 million of letters of credit outstanding.
- Net working-capital position: Net over-billings declined to $257.1 million from $290.5 million at December 31, 2012.
- Investing and financing cash flow: Investing cash use was $6.5 million, primarily capital expenditures. Financing cash use was $0.1 million; no share repurchases or dividends were paid during the quarter. The January 2013 regular dividend was accelerated and paid in December 2012.
- Backlog: Backlog was $3.42 billion at March 31, 2013, compared with $3.39 billion at March 31, 2012 and $3.37 billion at December 31, 2012.
Material Changes Versus the Prior Comparable Period
- United States facilities services revenue increased $67.8 million, and operating income increased $24.2 million, benefiting from industrial services, commercial site-based services, mobile mechanical services, improved job execution and more selective bidding.
- United States electrical construction and facilities services revenue rose to $307.6 million from $290.5 million, but operating income declined to $18.9 million from $23.6 million because of weaker results in water and wastewater and transportation projects. The prior-year period benefited from resolution of a healthcare construction claim.
- United States mechanical construction and facilities services revenue declined to $541.1 million from $574.2 million, while operating income fell to $11.1 million from $22.8 million, primarily due to lower activity and margins in institutional, healthcare, and water and wastewater construction.
- United Kingdom construction and facilities services revenue declined to $119.0 million from $140.9 million, and operating income declined to $1.3 million from $3.5 million. The segment experienced lower construction and facilities-services volume, project write-downs, and an unfavorable foreign-exchange effect.
- Restructuring expense was $1.4 million in Q1 2013, primarily for employee severance obligations in the United Kingdom construction operations. Approximately $1.4 million remained payable at March 31, 2013, mostly expected to be paid during 2013.
- Gross profit included an approximately $2.6 million insurance recovery related to a previously disposed operation. This was classified within cost of sales and is an unusual item supporting reported margins.
- Operating cash flow deteriorated substantially year over year, with cash used increasing by $62.0 million, primarily because of working-capital changes.
Outlook, Commentary, Risks, and Unusual Items
- Management reported a return to more traditional demand in United States facilities services but continued weakness in certain construction markets and the United Kingdom.
- Management stated that it remained disciplined in a competitive marketplace by accepting work it believed could be performed at reasonable margins.
- Management expects cash balances, available revolver capacity, and cash generated from operations to satisfy short-term and foreseeable long-term liquidity needs and capital expenditure requirements. No formal revenue or earnings guidance was provided in the filing.
- Long-term demand remains sensitive to non-residential construction activity, macroeconomic conditions, interest rates, governmental policy, and public-sector spending.
- Construction contracts frequently require payment and performance bonds. Estimated exposure under existing bonded projects was approximately $0.9 billion, assuming defaults on all covered contractual obligations. A reduction in bonding capacity could materially affect bidding, liquidity, results, or cash flow.
- Key operating risks include project execution, fixed-price contract cost overruns, commodity and fuel prices, customer creditworthiness, collection of contract receivables, unapproved change orders, and estimates under percentage-of-completion accounting.
- Legal and regulatory matters include government audits and investigations, asbestos-related gaskets, an explosion at a construction site involving a subsidiary as subcontractor, and other litigation. Management believes these matters are not expected to have a material adverse effect, but some potential losses cannot be estimated with certainty.
- Goodwill and identifiable intangible assets totaled approximately $904.0 million at March 31, 2013. No impairment was recorded, but future impairment risk would increase if operating results, projected growth, margins, or interest-rate assumptions deteriorate.
- The company had $11.3 million of unrecognized income tax benefits, of which approximately $3.0 million could be recognized during the next twelve months as statutes of limitation expire.
- The company was exposed to variable-rate debt, commodity prices, fuel prices, foreign exchange, and construction-market credit risk. A 25-basis-point change in interest rates would affect after-tax interest expense by approximately $0.2 million over the next twelve months based on outstanding revolver borrowings.
Investor Verification Checklist
- Verify whether the sharp improvement in United States facilities services margins is sustainable and distinguish recurring operating gains from the $2.6 million insurance recovery.
- Monitor United States mechanical construction and United Kingdom performance, including project write-downs, backlog trends, and construction-market demand.
- Reconcile operating cash flow with earnings and track receivables, contract assets, over-billings, and working-capital conversion.
- Review revolver covenants, available borrowing capacity, letters of credit, bonding capacity, and the November 2016 facility maturity.
- Assess the potential impact of litigation, government investigations, asbestos-related claims, and the construction-site explosion matter.
- Evaluate future goodwill and intangible-asset impairment sensitivity, particularly in the facilities services and mechanical construction reporting units.
- Confirm the continuation and funding of the planned $0.06 quarterly dividend and the remaining $48.6 million share-repurchase authorization.