EMCOR Group, Inc. — 2021 Q1 Form 10-Q Summary
Business context and reporting period
EMCOR provides electrical and mechanical construction, facilities, building, and industrial services through approximately 85 operating subsidiaries in the United States and United Kingdom. This filing covers the three months ended March 31, 2021, compared with the same period in 2020. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $2.304 billion | $2.300 billion | Up 0.2% |
| Gross profit | $341.1 million | $333.1 million | Up $8.0 million |
| Gross margin | 14.8% | 14.5% | Up 30 basis points |
| Operating income | $117.0 million | $106.0 million | Up $11.0 million |
| Operating margin | 5.1% | 4.6% | Up 50 basis points |
| Net income attributable to EMCOR | $84.8 million | $75.7 million | Up 12.0% |
| Diluted EPS | $1.54 | $1.35 | Up 14.1% |
| Operating cash flow | $(89.0) million | $(78.8) million | More cash used |
Cash, cash equivalents, and restricted cash declined to $759.8 million at March 31, 2021 from $903.6 million at December 31, 2020. Cash used in investing activities was $31.8 million, including $24.3 million for acquisitions and $8.2 million for capital expenditures. Cash used in financing activities was $23.9 million, including $12.9 million of share repurchases and $7.1 million of dividends.
Total debt was $276.4 million, including a $270.6 million term loan and finance lease liabilities. There were no direct borrowings under the $1.3 billion revolving credit facility, although $71.3 million of letters of credit were outstanding. The company reported compliance with all debt covenants. The credit agreement expires March 2, 2025.
Remaining performance obligations were $4.775 billion at March 31, 2021, including $4.055 billion expected to be recognized within one year. Accounts receivable were $2.038 billion, net of an $18.1 million allowance for credit losses. Current contract liabilities exceeded current contract assets by $547.2 million.
Material changes versus the prior comparable period
- United States mechanical construction and facilities services revenue increased 8.4% to $903.9 million, while operating income increased 43.8% to $65.0 million. Performance benefited from commercial, healthcare, and selected food-processing projects.
- United States building services revenue increased 10.3% to $581.8 million, and operating income increased 38.0% to $29.3 million, aided by snow removal, resumed project activity, facilities maintenance awards, and cost reductions.
- United Kingdom building services revenue increased 12.8% to $126.7 million, partly reflecting $9.5 million of favorable foreign exchange effects. Operating income increased to $9.4 million from $5.8 million.
- United States industrial services revenue declined 35.3% to $235.4 million. The segment reported a $2.4 million operating loss versus $15.4 million of operating income in Q1 2020, reflecting weaker oil and refined-products demand, customer project deferrals, and Gulf Coast weather and power disruptions.
- United States electrical construction revenue declined 1.2% to $456.2 million, while operating income was essentially unchanged at $40.3 million.
- SG&A declined to $224.1 million from $227.0 million, and the SG&A margin improved to 9.7% from 9.9%. Net interest expense declined to $1.4 million from $2.5 million.
- EMCOR acquired two companies during Q1 2021 for total consideration of approximately $24.0 million. Acquisitions made in 2021 and 2020 contributed approximately $29.1 million of incremental revenue and $0.9 million of incremental operating income in the quarter.
Outlook, commentary, risks, and unusual items
Management reported record first-quarter revenue, operating income, operating margin, net income, and diluted EPS. It described market conditions as cautiously optimistic and continued quoting new work, but did not provide quantified full-year earnings or revenue guidance in the filing.
COVID-19 continued to cause reduced labor efficiency, safety-related work disruptions, project delays, customer deferrals, and temporary shutdowns. The United States industrial services segment remained especially exposed to oil and gas market weakness. New virus variants, facility access restrictions, customer cancellations, supply disruptions, employee illness, and customers’ ability to pay could adversely affect results.
Other significant risks include estimation changes on fixed-price construction contracts, claims and unapproved change orders, customer credit losses, commodity and fuel inflation, variable interest rates, foreign exchange movements, litigation, government audits, and the availability of surety bonds. Surety-bond exposure was estimated at approximately $1.3 billion, or 28% of remaining performance obligations.
No significant contract-estimate revisions, contract losses, goodwill impairment, or restructuring expenses were recognized in Q1 2021. Approximately $2.6 million of restructuring obligations remained payable through 2022. The company adopted an income-tax accounting update without a material impact and is evaluating reference-rate-reform guidance.
Important facts for investors to verify
- Whether the United States industrial services downturn stabilizes or produces further losses, particularly under prolonged oil and gas weakness.
- Conversion and cancellation risk within the $4.775 billion remaining performance-obligation balance, including customer delays and contract modifications.
- Operating cash conversion, receivable collections, and working-capital requirements after $89.0 million of operating cash use in Q1.
- Impact of labor constraints, commodity prices, fuel costs, and COVID-19-related operating restrictions on fixed-price contract margins.
- Liquidity available under the revolving facility after $71.3 million of letters of credit and $71.2 million of letters of credit used as insurance collateral.
- Future impairment sensitivity in the United States industrial services reporting unit, whose latest excess fair value over carrying value was comparatively limited.
- Legal proceedings, government-contract audits, insurance liabilities, and potential exposure beyond recorded provisions.