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EME > SEC Filings for EME > Form 10-Q on 25-Apr-2013All Recent SEC Filings

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Form 10-Q for EMCOR GROUP INC


25-Apr-2013

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.
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 March 31, 2013 and 2012 (in thousands, except percentages and per share data):

                                                                 For the three months ended
                                                                         March 31,
                                                                    2013             2012
Revenues                                                      $    1,568,401     $ 1,538,521
Revenues increase from prior year                                        1.9 %          21.6 %
Operating income                                              $       51,265     $    46,189
Operating income as a percentage of revenues                             3.3 %           3.0 %
Net income attributable to EMCOR Group, Inc.                  $       30,167     $    27,145
Diluted earnings per common share from continuing operations  $         0.44     $      0.40

During the first quarter of 2013, we began to see a return to more traditional demand for our services within our United States facilities services segment, as revenues and/or operating income increased in a majority of the markets served by this segment. Offsetting this favorable performance in facilities services were weaker results from our United States construction segments and our United Kingdom construction and facilities services segment, when compared to the first quarter of 2012. Our overall increase in revenues for the first quarter of 2013, when compared to the prior year's first quarter, was attributable to higher revenues from our United States facilities services segment and our United States electrical construction and facilities services segment. The increase in our operating income for the three months ended March 31, 2013, compared to the same period in 2012, was attributable to higher operating income from our United States facilities services segment, partially offset by lower operating income from our United States construction segments and our United Kingdom construction and facilities services segment. For the quarter, overall operating margin increased primarily as a result of higher operating margins within our United States facilities services segment. This increase was partially offset by a decrease in operating margins in all our other operating segments. Net cash used in operating activities for the three months ended March 31, 2013 of $95.1 million increased, compared to $33.1 million of net cash used in operating activities for the three months ended March 31, 2012, primarily due to changes in our working capital.

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 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.


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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 March 31,
                                                                        % of                     % of
                                                        2013           Total        2012        Total
Revenues:
United States electrical construction and
facilities services                             $      307,584           20 %   $   290,537       19 %
United States mechanical construction and
facilities services                                    541,117           35 %       574,203       37 %
United States facilities services                      600,700           38 %       532,890       35 %
Total United States operations                       1,449,401           92 %     1,397,630       91 %
United Kingdom construction and facilities
services                                               119,000            8 %       140,891        9 %
Total worldwide operations                      $    1,568,401          100 %   $ 1,538,521      100 %

As described below in more detail, our revenues for the three months ended March 31, 2013 increased to $1.57 billion compared to $1.54 billion of revenues for the three months ended March 31, 2012. This increase in revenues was attributable to higher revenues from our United States facilities services segment and our United States electrical construction and facilities services segment, partially offset by lower revenues from our United States mechanical construction and facilities services segment and our United Kingdom construction and facilities services segment. While overall revenues have increased, we continue to be disciplined in a very competitive marketplace by only accepting work that we believe can be performed at reasonable margins.
Our backlog at March 31, 2013 was $3.42 billion compared to $3.39 billion of backlog at March 31, 2012. Our backlog was $3.37 billion at December 31, 2012. The increase in backlog at March 31, 2013, compared to such backlog at March 31, 2012, was primarily attributable to an increase in contracts awarded for work in our United States electrical construction and facilities services segment. This increase was partially offset by a decrease in backlog in our: (a) United Kingdom construction and facilities services segment, (b) United States facilities services segment and (c) United States mechanical construction and 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. 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 $307.6 million for the three months ended March 31, 2013 compared to revenues of $290.5 million for the three months ended March 31, 2012. The increase in revenues was primarily attributable to higher levels of work from industrial, institutional, commercial and hospitality construction projects, partially offset by a decrease in revenues from water and wastewater, healthcare and transportation construction projects.
Our United States mechanical construction and facilities services segment revenues for the three months ended March 31, 2013 were $541.1 million, a $33.1 million decrease compared to revenues of $574.2 million for the three months ended March 31, 2012. The decrease in revenues was primarily attributable to declines in revenues from healthcare, industrial, institutional, water and wastewater and hospitality construction projects, partially offset by an increase in revenues from commercial construction projects.
Revenues of our United States facilities services segment for the three months ended March 31, 2013 increased by $67.8 million compared to the three months ended March 31, 2012. The increase in revenues was primarily attributable to:
(a) revenues from our industrial services and (b) revenues from our commercial site-based services, partially offset by a decrease in revenues from our government site-based services. Our United Kingdom construction and facilities services segment revenues were $119.0 million for the three months ended March 31, 2013 compared to revenues of $140.9 million for the three months ended March 31, 2012. The decrease in revenues was attributable to: (a) a decrease in levels of work from its construction operations, primarily in the institutional and commercial markets, partially offset by an increase in the industrial market, (b) a decrease in levels of work from its facilities services operations, principally in the commercial and transportation markets, partially offset by an increase in the institutional market, and (c) a decrease of $1.8 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar.


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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
                                                     March 31,
                                                2013             2012
Cost of sales                             $    1,377,263     $ 1,357,828
Gross profit                              $      191,138     $   180,693
Gross profit, as a percentage of revenues           12.2 %          11.7 %

Our gross profit increased by $10.4 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The increase in gross profit was predominantly attributable to: (a) higher revenues and margins from our United States facilities services segment, (b) the receipt of an insurance recovery of approximately $2.6 million associated with a previously disposed of operation, which is classified as a component of "Cost of sales" on the Condensed Consolidated Statements of Operations and (c) lower amortization expense associated with identifiable intangible assets. This increase was partially offset by reduced revenues and/or margins from the remainder of our business segments.
Our gross profit margin was 12.2% and 11.7% for the three months ended March 31, 2103 and 2012, respectively. Gross profit margin increased in our United States facilities services segment, partially offset by a decrease in gross profit margin in all our other segments.
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
                                                                           March 31,
                                                                      2013              2012
Selling, general and administrative expenses                    $     138,510       $  134,504
Selling, general and administrative expenses, as a percentage
of revenues                                                               8.8 %            8.7 %

Our selling, general and administrative expenses for the three months ended March 31, 2013 increased by $4.0 million to $138.5 million compared to $134.5 million for the three months ended March 31, 2012. Selling, general and administrative expenses as a percentage of revenues were 8.8% and 8.7% for the three months ended March 31, 2013 and 2012, respectively. This increase in selling, general and administrative expenses primarily resulted from higher employee related costs, such as salaries and accrued incentive compensation, and professional fees. Selling, general and administrative expenses as a percentage of revenues increased slightly for the three months ended March 31, 2013 compared to the same period in 2012.
Restructuring expenses
Restructuring expenses were $1.4 million and zero for the three months ended March 31, 2013 and 2012, respectively, which primarily related to employee severance obligations in the construction operations of our United Kingdom construction and facilities services segment. As of March 31, 2013, the balance of obligations yet to be paid was $1.4 million, the majority of which is expected to be paid in 2013.


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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 March 31,
                                                                    % of                        % of
                                                                   Segment                     Segment
                                                     2013         Revenues         2012       Revenues
Operating income (loss):
United States electrical construction and
facilities services                             $    18,940          6.2 %     $   23,566        8.1 %
United States mechanical construction and
facilities services                                  11,140          2.1 %         22,823        4.0 %
United States facilities services                    35,627          5.9 %         11,429        2.1 %
Total United States operations                       65,707          4.5 %         57,818        4.1 %
United Kingdom construction and facilities
services                                              1,279          1.1 %          3,482        2.5 %
Corporate administration                            (14,358 )          -          (15,111 )        -
Restructuring expenses                               (1,363 )          -                -          -
Total worldwide operations                           51,265          3.3 %         46,189        3.0 %
Other corporate items:
Interest expense                                     (1,862 )                      (1,775 )
Interest income                                         357                           416
Income before income taxes                      $    49,760                    $   44,830

As described below in more detail, operating income was $51.3 million and $46.2 million for the three months ended March 31, 2013 and 2012, respectively. Operating margin was 3.3% for the three months ended March 31, 2013 compared to 3.0% for the three months ended March 31, 2012.
Operating income of our United States electrical construction and facilities services segment for the three months ended March 31, 2013 was $18.9 million compared to operating income of $23.6 million for the three months ended March 31, 2012. This decline in operating income was primarily the result of a decrease in gross profit from water and wastewater and transportation construction projects, partially offset by an increase in gross profit attributable to industrial and institutional construction projects. Additionally, operating income in 2012 benefited from the resolution of a construction claim on a healthcare project. Selling, general and administrative expenses increased slightly for the three months ended March 31, 2013, compared to the same period in 2012. The decrease in operating margin for the three months ended March 31, 2013 was the result of a decrease in gross profit margin. Our United States mechanical construction and facilities services segment operating income for the three months ended March 31, 2013 was $11.1 million, an $11.7 million decrease compared to operating income of $22.8 million for the three months ended March 31, 2012. This decrease in operating income was primarily due to a decrease in gross profit from institutional, healthcare and water and wastewater construction projects, partially offset by an increase in gross profit from commercial construction projects and lower amortization expense associated with identifiable intangible assets. Selling, general and administrative expenses for the quarter were flat when compared to the three months ended March 31, 2012. The decrease in operating margin for the three months ended March 31, 2013 was primarily the result of a reduction in gross profit margin and an increase in selling, general and administrative expenses as a percentage of revenues.
Operating income of our United States facilities services segment for the three months ended March 31, 2013 increased by $24.2 million compared to operating income for the three months ended March 31, 2012. This increase in operating income was primarily attributable to an increase in gross profit from this segment's: (a) industrial services, as a result of an increase in the demand for turnaround projects and our heat exchanger services, (b) commercial site-based services, partially attributable to an increase in revenues from snow removal, and (c) mobile mechanical services, partially as a result of higher project margins due to more selective bidding practices and improved job execution. The increase in operating income was partially offset by lower gross profit from our government site-based services as a result of a reduction in discretionary government project spending and contracts lost in 2012. Operating income was negatively impacted by an increase in selling, general and administrative expenses, primarily due to: (a) an increase in employee related costs, such as incentive compensation, and (b) real estate related costs. This segment's operating income in the first quarter of 2012 was adversely impacted by start up and transition costs relating to new commercial site-based contracts. The increase in operating margin for the three months ended March 31, 2013 was primarily the


Table of Contents

result of an increase in gross profit margin, primarily due to increased margins from our industrial, mobile mechanical and commercial site-based services operations and a decrease in selling, general and administrative expenses as a percentage of revenues.
Our United Kingdom construction and facilities services segment operating income for the three months ended March 31, 2013 was $1.3 million compared to operating income of $3.5 million for the three months ended March 31, 2012. This decrease in operating income was primarily attributable to a decrease in gross profit resulting from a loss in its construction services operations as a result of lower volume and project write-downs, partially offset by lower selling general and administrative expenses predominantly as a result of lower employee related costs. Operating margin in this segment decreased year over year due to the operating loss from its construction services operations.
Our corporate administration expenses for the three months ended March 31, 2013 were $14.4 million compared to $15.1 million for the three months ended March 31, 2012. Excluding the receipt of an insurance recovery of approximately $2.6 million in the first quarter of 2013 associated with a previously disposed of operation, which is classified as a component of "Cost of sales" on the Condensed Consolidated Statements of Operations, our corporate administration operating loss increased primarily due to higher employee related costs, such as salaries and incentive compensation, and professional fees.
Interest expense for the three months ended March 31, 2013 and 2012 was $1.9 million and $1.8 million, respectively. Interest income for each of the three months ended March 31, 2013 and 2012 was $0.4 million.
For the three months ended March 31, 2013 and 2012, our income tax provision was $19.0 million and $17.0 million, respectively, based on effective income tax rates, before discrete items and less amounts attributable to noncontrolling interests, of 38.5% and 38.4%, respectively. The actual income tax rates on income before income taxes, less amounts attributable to noncontrolling interests, for the three months ended March 31, 2013 and 2012, inclusive of discrete items, were 38.7% and 38.5%, respectively. The increase in the 2013 income tax provision was primarily due to increased income before income taxes and a change in the allocation of earnings among various jurisdictions. Liquidity and Capital Resources
The following table presents our net cash provided by (used in) operating activities, investing activities and financing activities (in thousands):

                                                                 For the three months ended
                                                                         March 31,
                                                                    2013              2012
Net cash used in operating activities                         $     (95,102 )     $  (33,129 )
Net cash used in investing activities                         $      (6,456 )     $  (28,701 )
Net cash used in financing activities                         $        (103 )     $  (12,445 )
Effect of exchange rate changes on cash and cash equivalents  $      (4,540 )     $    1,608

Our consolidated cash balance decreased by approximately $106.2 million from $605.3 million at December 31, 2012 to $499.1 million at March 31, 2013. Net cash used in operating activities for the three months ended March 31, 2013 was $95.1 million compared to $33.1 million of net cash used in operating activities for the three months ended March 31, 2012. The increase in net cash used in operating activities was primarily due to changes in our working capital. Net cash used in investing activities was $6.5 million for the three months ended March 31, 2013 compared to net cash used in investing activities of $28.7 million for the three months ended March 31, 2012. The decrease in net cash used in investing activities was primarily due to a $19.2 million decrease in payments for acquisitions of businesses. Net cash used in financing activities for the three months ended March 31, 2013 decreased by approximately $12.3 million, compared to the three months ended March 31, 2012, inasmuch as no funds were used for the repurchase of common stock in the first quarter 2013 and no dividends were paid in the first quarter of 2013. Payment of the regular quarterly dividend that would have been paid the first quarter of 2013 was accelerated and paid in December 2012.


Table of Contents

The following is a summary of material contractual obligations and other commercial commitments (in millions):

                                                                     Payments Due by Period
                                                          Less
                                                          than           1-3          3-5          After
Contractual Obligations                   Total          1 year         years        years        5 years
Revolving Credit Facility (including
interest at 1.70%) (1)                 $    159.4     $       2.6     $    5.2     $  151.6     $       -
Capital lease obligations                     5.4             1.8          2.8          0.8             -
Operating leases                            194.6            51.1         81.2         48.5          13.8
Open purchase obligations (2)               869.5           693.6        166.0          9.9             -
Other long-term obligations,
including current portion (3)               267.7            31.8        231.1          4.8             -
Liabilities related to uncertain
income tax positions                         14.1             5.6          2.5          4.4           1.6
Total Contractual Obligations          $  1,510.7     $     786.5     $  488.8     $  220.0     $    15.4

                                                            Amount of Commitment Expiration by Period
                                                          Less
                                          Total          than 1          1-3          3-5          After
Other Commercial Commitments            Committed         year          years        years        5 years
Letters of credit                      $     88.2     $      88.2     $      -     $      -     $       -


 _________


(1) We classify these borrowings as long-term on our Condensed Consolidated Balance Sheets because of our intent to repay the amounts on a long-term basis. These amounts are outstanding at our discretion and are not payable until the 2011 Revolving Credit Facility expires in November 2016. As of March 31, 2013, there were borrowings of $150.0 million outstanding under the 2011 Revolving Credit Facility.

(2) Represents open purchase orders for material and subcontracting costs related to construction and service contracts. These purchase orders are not reflected in EMCOR's Condensed Consolidated Balance Sheets and should not impact future cash flows, as amounts should be recovered through customer billings.

(3) Represents primarily insurance related liabilities and liabilities for deferred income taxes, incentive compensation and earn-out arrangements, classified as other long-term liabilities in the Condensed Consolidated Balance Sheets. Cash payments for insurance related liabilities may be payable beyond three years, but it is not practical to estimate these payments; therefore, the long-term insurance related liabilities are reflected in the 1-3 years payment period. We provide funding to our post retirement plans based on at least the minimum funding required by applicable regulations. In determining the minimum required funding, we utilize current actuarial assumptions and exchange rates to forecast estimates of amounts that may be payable for up to five years in the future. In our judgment, minimum funding estimates beyond a five year time horizon cannot be reliably estimated, and therefore, have not been included in the table.

Effective November 21, 2011, we entered into an amended and restated $750.0 million revolving credit facility (the "2011 Revolving Credit Facility"). The 2011 Revolving Credit Facility expires on November 21, 2016 and permits us to increase our borrowing to $900.0 million if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We . . .

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