EMCOR Group, Inc. quarterly report, Q3 FY2021

EMCOR Group, Inc. — 2021 Q3 Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The unaudited filing covers EMCOR’s electrical and mechanical construction, building services, industrial services, and United Kingdom building services operations.

Financial Performance and Position

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Revenue	$2.522 billion	$2.202 billion	$7.263 billion	$6.516 billion
Gross profit	$381.3 million	$363.2 million	$1.099 billion	$1.012 billion
Gross margin	15.1%	16.5%	15.1%	15.5%
Operating income	$137.4 million	$135.9 million	$387.8 million	$119.2 million
Operating margin	5.4%	6.2%	5.3%	1.8%
Net income attributable to EMCOR	$99.7 million	$61.2 million	$281.9 million	$53.2 million
Diluted EPS	$1.85	$1.11	$5.17	$0.96

Q3 revenue increased 14.5% year over year and represented a quarterly record. Revenue increased in every reportable segment.
For the nine-month period, revenue increased 11.5%. Acquisitions contributed approximately $50.3 million of incremental Q3 revenue and $133.2 million for the nine-month period.
Q3 operating income increased only marginally because lower gross margins in the U.S. construction and U.S. building services segments offset revenue growth. SG&A leverage partially mitigated the pressure.
Year-to-date operating income benefited from the absence of the $232.8 million non-cash impairment charge recorded in 2020, including $225.5 million of goodwill impairment and $7.3 million of identifiable intangible and other long-lived asset impairment.
The 2021 effective income tax rates were 27.2% for Q3 and 27.1% year to date, versus 54.7% and 53.9%, respectively, in 2020. The prior-year rates were elevated primarily because most 2020 impairment charges were non-deductible.

Cash Flow, Liquidity, Debt, and Capital Allocation

Net cash provided by operating activities was $113.9 million for the first nine months of 2021, down from $546.8 million in 2020. The decrease primarily reflected higher working capital needs from revenue growth, including increases in accounts receivable and contract assets, and the absence of approximately $67.3 million of payroll-tax deferrals that benefited 2020 cash flow.
Net cash used in investing activities was $137.5 million, including $113.7 million for acquisitions and $26.0 million for capital expenditures.
Net cash used in financing activities was $213.1 million, including $183.2 million of share repurchases and $21.2 million of dividends.
Cash, cash equivalents, and restricted cash declined from $903.6 million at December 31, 2020 to $665.0 million at September 30, 2021. Cash and cash equivalents alone were $663.9 million.
Total debt was $275.7 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 reduced availability.
The credit agreement expires March 2, 2025. EMCOR was in compliance with its financial covenants at September 30, 2021. Scheduled term-loan principal payments are approximately $13.9 million annually, with remaining principal due at maturity.
During the first nine months, EMCOR repurchased approximately 1.5 million shares for $183.2 million. Approximately $62.7 million remained available under the authorization at September 30; after quarter-end, the board authorized an additional $300 million.
The regular quarterly dividend was $0.13 per share.

Material Changes Versus Prior Comparable Period

U.S. mechanical construction revenue rose to $999.6 million in Q3 and $2.862 billion year to date; year-to-date operating income increased to $226.5 million from $192.2 million.
U.S. electrical construction revenue rose to $527.9 million in Q3 and $1.474 billion year to date. Year-to-date operating income increased to $127.0 million, but Q3 operating margin declined to 8.3% from 9.7%.
U.S. building services revenue increased to $632.5 million in Q3 and $1.839 billion year to date. Q3 operating income declined to $31.6 million from $38.4 million, primarily because of lower gross margins.
U.S. industrial services revenue increased 35.4% in Q3, but declined 9.5% year to date to $702.8 million. The segment reported a year-to-date operating loss of $5.7 million versus $9.8 million of operating income in 2020, reflecting continued weakness in oil and gas markets and a $4.1 million increase in credit-loss provision related to a specific customer bankruptcy.
United Kingdom building services revenue and operating income increased in both periods, with favorable foreign-exchange effects contributing $8.0 million of Q3 revenue and $32.0 million of year-to-date revenue.
Remaining performance obligations increased to $5.379 billion at September 30, 2021, from $4.595 billion at December 31, 2020 and $4.530 billion at September 30, 2020. Approximately $4.538 billion was expected to be recognized within one year.
Five companies were acquired during the first nine months for total consideration of $125.4 million. Purchase-price allocations for three acquisitions remained preliminary.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

The filing does not provide specific quantitative earnings or revenue guidance. Management states that it is cautiously optimistic about its markets and believes available financial resources are sufficient for short-term and foreseeable long-term liquidity needs.
COVID-19 effects had largely receded in most operations but continued to affect U.S. industrial services through lower oil and gas demand, deferred maintenance, reduced capital spending, facility closures, and customer cost reductions.
Management identified potential risks from renewed COVID-19 disruptions, employee illness or quarantine, vaccination and testing requirements, supply-chain interruptions, material shortages, commodity-price inflation, project delays or cancellations, and customer credit deterioration.
At the filing date, details of the proposed OSHA emergency temporary standard for large employers were uncertain. Management warned that mandatory testing costs could be substantial if a significant portion of employees remained unvaccinated.
Construction contracts frequently require payment and performance bonds. Estimated exposure assuming defaults on all covered contractual obligations was approximately $1.4 billion, or 27% of remaining performance obligations. Management was not aware of losses on posted surety bonds and did not expect significant foreseeable losses.
Deferred employer payroll taxes of approximately $102.5 million from 2020 were scheduled for payment in two equal installments due by January 3, 2022 and January 3, 2023.
Insurance liabilities, including self-insured and captive-insurance obligations, totaled approximately $306.5 million on an undiscounted basis at September 30, 2021, partially offset by anticipated insurance recoveries.
Management reported no material legal, government-contract, or restructuring matters expected to adversely affect financial position, results, or liquidity, but noted that litigation outcomes are uncertain.
No 2021 impairment indicators were identified. U.S. industrial services remained the most sensitive reporting unit; adverse changes in market conditions, forecasts, discount rates, or growth assumptions could result in future impairment charges.

Important Facts for Investors to Verify

Whether lower gross margins persist as construction work mix, fixed-price project execution, labor costs, material costs, and commodity prices evolve.
The pace and profitability of recovery in U.S. industrial services, including oil and gas demand, customer maintenance spending, and collection of the specific receivable associated with the customer bankruptcy.
Conversion of the $5.38 billion remaining performance obligation balance into revenue and cash, including the impact of customer cancellations, change orders, claims, and project execution.
Operating cash-flow conversion and working-capital requirements, particularly accounts receivable, contract assets, contract liabilities, and customer payment behavior.
Integration and final purchase-price allocations for the 2021 acquisitions, including the resulting goodwill and identifiable intangible assets.
Availability of surety bonds and letters of credit, compliance with credit-agreement covenants, and the ability to fund acquisitions, share repurchases, dividends, and deferred payroll-tax payments.
Potential costs and operational effects of COVID-19-related vaccination or testing requirements, supply-chain disruptions, cyber risks, and future impairment testing.