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EME > SEC Filings for EME > Form 10-Q on 25-Oct-2012All Recent SEC Filings

Show all filings for EMCOR GROUP INC

Form 10-Q for EMCOR GROUP INC


25-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We are one of the largest electrical and mechanical construction and facilities services firms in the United States and the United Kingdom. We provide services to a broad range of commercial, industrial, utility and institutional customers through approximately 70 operating subsidiaries and joint venture entities. Our offices are located in the United States and the United Kingdom. The results of operations for the 2011 period presented reflect discontinued operations accounting due to the disposition in August 2011 of our interest in our then Canadian subsidiary. In addition, our reportable segments reflect certain reclassifications of prior year amounts from our United States facilities services segment to our United States mechanical construction and facilities services segment due to changes in our internal reporting structure. Overview
The following table presents selected financial data for the three months ended September 30, 2012 and 2011 (in thousands, except percentages and per share data):

                                                                 For the three months ended
                                                                       September 30,
                                                                    2012             2011
Revenues                                                      $    1,606,242     $ 1,482,241
Revenues increase from prior year                                        8.4 %          21.5 %
Operating income                                              $       68,626     $    56,487
Operating income as a percentage of revenues                             4.3 %           3.8 %
Income from continuing operations                             $       40,310     $    33,061
Net income attributable to EMCOR Group, Inc.                  $       39,581     $    40,758
Diluted earnings per common share from continuing operations  $         0.59     $      0.47

We remain cautiously optimistic regarding some of our end user markets as revenues, operating income and operating margins showed an increase from 2011 levels inasmuch as we continue to experience excellent large project execution and see increased demand in some of our offerings, including those within the industrial and oil and gas markets. The increase in revenues for the third quarter of 2012, when compared to the prior year's third quarter, was primarily attributable to: (a) higher revenues from the majority of our business segments, excluding the effect of acquisitions, and (b) revenues of $27.3 million attributable to companies acquired in 2012 and 2011, which are reported within our United States mechanical construction and facilities services segment and our United States facilities services segment. The increase in operating income, excluding the effect of acquisitions, for the three months ended September 30, 2012, compared to the same period in 2011, was primarily attributable to higher operating income from our United States facilities services segment and our United States electrical construction and facilities services segment, partially offset by lower operating income from our United States mechanical construction and facilities services segment. Companies acquired in 2012 and 2011, which are reported within our United States mechanical construction and facilities services segment and our United States facilities services segment, contributed $0.6 million to operating income, reflecting less than $0.1 million of amortization expense associated with identifiable intangible assets, for the three months ended September 30, 2012. Operating margin increased primarily as a result of higher operating margins within our United States facilities services segment and our United States electrical construction and facilities services segment. This increase was partially offset by a decrease in operating margin within our United States mechanical construction and facilities services segment. Net cash provided by operating activities for the nine months ended September 30, 2012 of $42.0 million compared to $58.7 million of net cash provided by operating activities for the nine months ended September 30, 2011 was primarily due to an increase in accounts receivables and other changes in our working capital.
We completed one acquisition during the first nine months of 2012 for an immaterial amount. The results of the acquired company, which primarily provides mechanical construction services, have been included in our United States mechanical construction and facilities services segment; the acquired company expands our service capabilities into new geographical and technical areas. The acquisition is not material to our results of operations for the periods presented.

Operating Segments
We have the following reportable segments: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; premises electrical and lighting systems; low-voltage systems, such as fire


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alarm, security and process control; voice and data communication; roadway and transit lighting; and fiber optic lines); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation; fire protection; plumbing, process and high-purity piping; controls and filtration; water and wastewater treatment and central plant heating and cooling; cranes and rigging; millwrighting; and steel fabrication, erection and welding); (c) United States facilities services; and (d) United Kingdom construction and facilities services. The segment "United States facilities services" principally consists of those operations which provide a portfolio of services needed to support the operation and maintenance of customers' facilities. The United Kingdom construction and facilities services segment performs electrical construction, mechanical construction and facilities services. In August 2011, we sold our then Canadian subsidiary, which represented our Canada construction segment and which performed electrical construction and mechanical construction. Results of Operations
Revenues
The following tables present our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages):

                                                     For the three months ended September 30,
                                                                     % of                     % of
                                                      2012          Total        2011        Total
Revenues:
United States electrical construction and
facilities services                             $       318,960       20 %   $   290,337       20 %
United States mechanical construction and
facilities services                                     563,143       35 %       520,305       35 %
United States facilities services                       600,227       37 %       532,413       36 %
Total United States operations                        1,482,330       92 %     1,343,055       91 %
United Kingdom construction and facilities
services                                                123,912        8 %       139,186        9 %
Total worldwide operations                      $     1,606,242      100 %   $ 1,482,241      100 %


                                                      For the nine months ended September 30,
                                                                     % of                     % of
                                                      2012          Total        2011        Total
Revenues:
United States electrical construction and
facilities services                             $       905,343       19 %   $   865,390       21 %
United States mechanical construction and
facilities services                                   1,718,166       36 %     1,417,637       35 %
United States facilities services                     1,706,647       36 %     1,427,525       35 %
Total United States operations                        4,330,156       91 %     3,710,552       91 %
United Kingdom construction and facilities
services                                                404,642        9 %       384,945        9 %
Total worldwide operations                      $     4,734,798      100 %   $ 4,095,497      100 %

As described below in more detail, our revenues for the three months ended September 30, 2012 increased to $1.6 billion compared to $1.5 billion of revenues for the three months ended September 30, 2011, and our revenues for the nine months ended September 30, 2012 increased to $4.7 billion compared to $4.1 billion for the nine months ended September 30, 2011. The overall increase in revenues was primarily attributable to: (a) higher revenues from the majority of our business segments, excluding the effect of acquisitions, and (b) revenues of $27.3 million and $275.6 million for the three and nine months ended September 30, 2012, respectively, attributable to companies acquired in 2012 and 2011, which are reported within our United States mechanical construction and facilities services segment and our United States facilities services segment. While we have increased revenues, we continue to be disciplined in a very competitive marketplace by only accepting work that we believe can be performed at a reasonable margin.
Our backlog at September 30, 2012 was $3.38 billion compared to $3.54 billion of backlog at September 30, 2011. Our backlog was $3.33 billion at December 31, 2011. The decrease in backlog at September 30, 2012, compared to such backlog at September 30, 2011, was primarily attributable to a decrease in contracts awarded for work in our United Kingdom segment, our United States electrical construction and facilities services segment and our United States facilities services segment, excluding the effect of acquisitions. This decrease was partially offset by: (a) an increase in our United States mechanical construction and facilities services segment and (b) an increase of $32.5 million in backlog associated with the acquisition of two companies, one in 2012 and one in 2011, which are included in our United States mechanical construction and facilities services segment and our


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United States facilities services segment. Backlog increases with awards of new contracts and decreases as we perform work on existing contracts. Backlog is not a term recognized under United States generally accepted accounting principles; however, it is a common measurement used in our industry. Backlog includes unrecognized revenues to be realized from uncompleted construction contracts plus unrecognized revenues expected to be realized over the remaining term of facilities services contracts. However, if the remaining term of a facilities services contract exceeds 12 months, the unrecognized revenues attributable to such contract included in backlog are limited to only the next 12 months of revenues.
Revenues of our United States electrical construction and facilities services segment were $319.0 million and $905.3 million for the three and nine months ended September 30, 2012, respectively, compared to revenues of $290.3 million and $865.4 million for the three and nine months ended September 30, 2011, respectively. The increase in revenues for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011 was primarily attributable to higher levels of work from industrial, institutional and commercial construction projects. This increase for both periods was partially offset by a decrease in revenues from healthcare, water and wastewater and transportation construction projects. Additionally, the increase in revenues for the nine months was partially offset by a decrease in revenues from hospitality construction projects, principally in the Las Vegas market.
Our United States mechanical construction and facilities services segment revenues for the three months ended September 30, 2012 were $563.1 million, a $42.8 million increase compared to revenues of $520.3 million for the three months ended September 30, 2011. Revenues of this segment for the nine months ended September 30, 2012 were $1,718.2 million, a $300.5 million increase compared to revenues of $1,417.6 million for the nine months ended September 30, 2011. The increase in revenues for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011, was primarily attributable to: (a) revenues of approximately $25.7 million and $100.8 million, respectively, generated by companies acquired in 2012 and 2011, which primarily provide mechanical construction services and (b) an increase in revenues from industrial, commercial and transportation construction projects. These increases were partially offset by a decrease in revenues from institutional, healthcare, hospitality and water and wastewater construction projects.
Revenues of our United States facilities services segment for the three months ended September 30, 2012 increased by $67.8 million compared to the three months ended September 30, 2011, and revenues for the nine months ended September 30, 2012 increased by $279.1 million compared to the nine months ended September 30, 2011. The increase in revenues for the three and nine months ended September 30, 2012 was primarily attributable to: (a) revenues from our industrial services operations, (b) revenues from our government site-based operations and
(c) revenues of approximately $1.6 million and $174.8 million, respectively, generated by companies acquired in 2011, which perform facilities maintenance services and mobile mechanical services. The increases for both periods were partially offset by a decrease in revenues from our energy services operations. Our United Kingdom construction and facilities services segment revenues were $123.9 million and $404.6 million for the three and nine months ended September 30, 2012 compared to revenues of $139.2 million and $384.9 million for the three and nine months ended September 30, 2011. The decrease in revenues for the three months ended September 30, 2012 compared to the three months ended September 30, 2011 was attributable to: (a) a decrease in levels of work from its construction operations, primarily in the transportation and institutional markets (b) a decrease in levels of work from its facilities services operations, principally in the commercial market, and (c) a decrease of $2.3 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The increase in revenues for the nine months ended September 30, 2012 compared to the prior period was attributable to an increase in levels of work from its facilities services operations, primarily in the commercial market, and from its construction operations, principally in the institutional market, partially offset by a decrease of $9.4 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. Cost of sales and Gross profit The following tables present our cost of sales, gross profit (revenues less cost of sales) and gross profit margin (gross profit as a percentage of revenues) (in thousands, except for percentages):

                                             For the three months ended         For the nine months ended
                                                   September 30,                      September 30,
                                                2012             2011             2012             2011
Cost of sales                             $    1,402,994     $ 1,293,974     $   4,156,893     $ 3,575,865
Gross profit                              $      203,248     $   188,267     $     577,905     $   519,632
Gross profit, as a percentage of revenues           12.7 %          12.7 %            12.2 %          12.7 %

Our gross profit increased by $15.0 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Gross profit increased by $58.3 million for the nine months ended September 30, 2012 compared to


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the nine months ended September 30, 2011. The increase in gross profit for both periods was primarily attributable: (a) higher revenues from the majority of our business segments and (b) companies acquired in 2012 and 2011 within our United States mechanical construction and facilities services segment and our United States facilities services segment, which contributed $3.4 million and $26.4 million to gross profit, net of amortization expense attributable to identifiable intangible assets of zero and $0.2 million for the three and nine months ended September 30, 2012, respectively.
Our gross profit margin was 12.7% for each of the three months ended September 30, 2012 and 2011. Gross profit margin was 12.2% and 12.7% for the nine months ended September 30, 2012 and 2011, respectively. Although gross profit margin for the three month periods remained unchanged, gross profit margin increased for the three months ended September 30, 2012 in our United States electrical construction and facilities services segment and our United States facilities services segment, partially offset by a decrease in gross profit margin in our United States mechanical construction and facilities services segment. The decrease in gross profit margin for the nine months ended September 30, 2012 was primarily the result of: (a) lower gross profit margins in our United States mechanical construction and facilities services segment and our United Kingdom segment and (b) lower gross profit margins from our 2011 acquisitions in our United States facilities services segment, primarily due to a decline in snow removal revenues as a result of the unseasonably warm winter experienced throughout most of the Eastern United States and lower margins, when compared to our historical operations. Additionally, gross profit margin for the nine months ended September 30, 2011 benefited from the resolution of uncertainties associated with a hospitality construction project. This decrease in gross profit margin for the three and nine months ended September 30, 2012 was partially offset by an increase in gross profit margin from our United States electrical construction and facilities services segment. Selling, general and administrative expenses The following tables present our selling, general and administrative expenses and selling, general and administrative expenses as a percentage of revenues (in thousands, except for percentages):

                                                 For the three months ended         For the nine months ended
                                                       September 30,                      September 30,
                                                    2012              2011             2012             2011
Selling, general and administrative expenses  $     134,477       $  131,780     $     406,656       $ 370,164
Selling, general and administrative expenses,
as a percentage of revenues                             8.4 %            8.9 %             8.6 %           9.0 %

Our selling, general and administrative expenses for the three months ended September 30, 2012 increased by $2.7 million to $134.5 million compared to $131.8 million for the three months ended September 30, 2011. Selling, general and administrative expenses for the nine months ended September 30, 2012 increased by $36.5 million to $406.7 million compared to $370.2 million for the nine months ended September 30, 2011. Selling, general and administrative expenses as a percentage of revenues were 8.4% and 8.6% for the three and nine months ended September 30, 2012, respectively, compared to 8.9% and 9.0% for the three and nine months ended September 30, 2011, respectively. This increase in selling, general and administrative expenses for both periods was primarily due to: (a) $2.8 million and $24.0 million of expenses directly related to companies acquired in 2012 and 2011, including amortization expense attributable to identifiable intangible assets of less than $0.1 million and $4.8 million for the three and nine months ended September 30, 2012, respectively, and (b) higher employee related costs, such as incentive compensation, partially as a result of better results, and share-based compensation costs. Additionally, the increase in selling, general and administrative expenses for the nine months ended September 30, 2012 was due to higher salaries. The increase in selling, general and administrative expenses for the nine months ended September 30, 2012 were partially offset by a decrease in professional fees, as we had incurred approximately $4.6 million of transaction costs associated with an acquisition made in the second quarter of 2011. The decreases in selling, general and administrative expenses as a percentage of revenues for the three and nine months ended September 30, 2012, compared to the same periods in 2011, related to our ability to increase revenues at a greater rate than the increase in overhead costs.
Restructuring expenses
Restructuring expenses were $0.1 million for each of the three and nine months ended September 30, 2012, which primarily related to employee severance obligations and the termination of leased facilities incurred in our United States facilities services segment. Restructuring expenses were zero and $1.1 million for the three and nine months ended September 30, 2011, respectively, which primarily related to employee severance obligations incurred at our corporate headquarters. As of September 30, 2012, the balance of obligations yet to be paid was $0.1 million, the majority of which is expected to be paid after 2012.


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Operating income
The following tables present our operating income (loss) and operating income
(loss) as a percentage of segment revenues from unrelated entities (in thousands, except for percentages):

                                                         For the three months ended September 30,
                                                                     % of                          % of
                                                                    Segment                       Segment
                                                     2012          Revenues          2011        Revenues
Operating income (loss):
United States electrical construction and
facilities services                             $     22,146          6.9 %     $     17,137        5.9 %
United States mechanical construction and
facilities services                                   27,186          4.8 %           33,582        6.5 %
United States facilities services                     31,992          5.3 %           17,100        3.2 %
Total United States operations                        81,324          5.5 %           67,819        5.0 %
United Kingdom construction and facilities
services                                               1,646          1.3 %            1,757        1.3 %
Corporate administration                             (14,199 )          -            (13,089 )        -
Restructuring expenses                                  (145 )          -                  -          -
Total worldwide operations                            68,626          4.3 %           56,487        3.8 %
Other corporate items:
Interest expense                                      (1,807 )                        (2,824 )
Interest income                                          381                             412
Income from continuing operations before income
taxes                                           $     67,200                    $     54,075



                                                        For the nine months ended September 30,
                                                                      % of                       % of
                                                                     Segment                    Segment
                                                      2012          Revenues        2011       Revenues
Operating income (loss):
United States electrical construction and
facilities services                             $      68,121          7.5 %     $  57,983        6.7 %
United States mechanical construction and
facilities services                                    79,021          4.6 %        79,672        5.6 %
United States facilities services                      59,937          3.5 %        47,155        3.3 %
Total United States operations                        207,079          4.8 %       184,810        5.0 %
United Kingdom construction and facilities
services                                                9,090          2.2 %         8,150        2.1 %
Corporate administration                              (44,920 )          -         (43,492 )        -
Restructuring expenses                                   (145 )          -          (1,099 )        -
Total worldwide operations                            171,104          3.6 %       148,369        3.6 %
Other corporate items:
Interest expense                                       (5,460 )                     (8,374 )
Interest income                                         1,165                        1,443
Income from continuing operations before income
taxes                                           $     166,809                    $ 141,438

As described below in more detail, operating income was $68.6 million and $171.1 million for the three and nine months ended September 30, 2012, respectively, and $56.5 million and $148.4 million for the three and nine months ended September 30, 2011, respectively. Operating margin was 4.3% for the three months ended September 30, 2012 compared to 3.8% for the three months ended September 30, 2011, and operating margin was 3.6% for each of the nine months ended September 30, 2012 and 2011.
Operating income of our United States electrical construction and facilities services segment for the three and nine months ended September 30, 2012 was $22.1 million and $68.1 million, respectively, compared to operating income of $17.1 million and $58.0 million for the three and nine months ended September 30, 2011, respectively. The increase in operating income for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011 was primarily the result of an increase in gross profit from industrial and institutional construction projects, and from water and wastewater


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construction projects primarily in the New York market. Additionally, the nine months ended September 30, 2012 benefited from the favorable resolution of a construction claim on a healthcare project. The increase in operating income was partially offset by a decrease in gross profit attributable to commercial and healthcare construction projects, and from hospitality construction projects primarily within the Las Vegas market. Additionally, the nine months ended September 30, 2011 benefited from the favorable resolution of uncertainties on a completed institutional construction project. Selling, general and administrative expenses increased for both periods in 2012 compared to 2011 due to an increase in employment costs, primarily incentive compensation accruals as a result of better results, and higher professional fees. The increase in operating margin for the three and nine months ended September 30, 2012 was primarily the result of an increase in gross profit margin. The increase in . . .

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