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EME > SEC Filings for EME > Form 10-Q on 24-Oct-2013All Recent SEC Filings

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Form 10-Q for EMCOR GROUP INC


24-Oct-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. During the third quarter of 2013, we completed the acquisition of RepconStrickland, Inc. ("RSI"), a leading provider of recurring turnaround and specialty services to the North American refinery and petrochemical markets. In connection with the acquisition of RSI and to reflect changes in our internal reporting structure and the information used by management to make operating decisions and assess performance, we created a new segment that includes RSI and certain businesses that had been part of our United States facilities services segment. The new segment is called the United States industrial services segment and the segment formerly named United States facilities services segment has been renamed United States building services segment.
Our reportable segments have been restated in all periods presented to reflect the changes in our segments mentioned above. In addition, our reportable segments reflect certain reclassifications of prior year amounts from our United States building 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, 2013 and 2012 (in thousands, except percentages and per share data):

                                                                For the three months ended
                                                                      September 30,
                                                                   2013             2012
Revenues                                                     $    1,629,067     $ 1,606,242
Revenues increase from prior year                                       1.4 %           8.4 %
Operating income                                             $       54,122     $    68,626
Operating income as a percentage of revenues                            3.3 %           4.3 %
Restructuring expenses                                       $        2,466     $       145
Net income attributable to EMCOR Group, Inc.                 $       26,690     $    39,581
Diluted earnings per common share from continuing operations $         0.39     $      0.59

Although the revenues for the third quarter of 2013 slightly increased compared to the 2012 third quarter, operating income and operating margin (operating income as a percentage of revenues) decreased in the 2013 third quarter compared to the 2012 third quarter. The increase in revenues for the third quarter of 2013 was primarily attributable to $47.7 million in revenues from companies acquired in 2013, which are reported in our United States industrial services segment and our United States mechanical construction and facilities services segment. Excluding the impact of these acquisitions, revenues for the third quarter of 2013 decreased primarily due to lower revenues from our United States industrial services segment and our United Kingdom construction and facilities services segment. Revenues from the United States industrial services segment in the 2012 third quarter were favorably impacted by three large non-recurring turnaround and repair projects that accounted for $49.9 million of revenues, resulting in record levels of revenues for a third quarter for that segment. The decrease in revenues for the third quarter of 2013 within the United Kingdom construction and facilities services segment is due to our decision earlier this year to withdraw from the United Kingdom construction market. These decreases were partially offset by higher revenues from our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment and our United States building services segment. Third quarter 2013 operating income and operating margin were below that of 2012 as 2012 third quarter gross profit was favorably impacted by three large non-recurring turnaround and repair projects reported within our United States industrial services segment. Offsetting the unfavorable performance in the 2013 third quarter was continued improvement in operating results in our United States building services segment, as well as improved performance in our United States electrical construction and facilities services segment. Companies acquired in 2013, which are reported in our United States industrial segment and our United States mechanical construction and facilities services segment, had combined operating losses of $1.7 million, including $2.4 million of amortization expense associated with identifiable intangible assets for the third quarter of 2013.


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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 building services; (d) United States industrial services; and (e) United Kingdom construction and facilities services. The segment "United States building services" principally consists of those operations which provide a portfolio of services needed to support the operation and maintenance of customers' facilities. The segment "United States industrial services" principally consists of those operations which provide industrial maintenance and services, including those for refineries and petrochemical plants. The United Kingdom construction and facilities services segment performs electrical construction, mechanical construction and facilities services. As previously discussed, we completed the acquisition of RSI during the third quarter of 2013, and its results have been included in our United States industrial services segment since its acquisition. In addition, we completed another acquisition during the second quarter of 2013, and its results have been included in our United States mechanical construction and facilities services segment since its acquisition. Both of these businesses expand our service capabilities into new technical areas. 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
                                                      2013          Total        2012        Total
Revenues:
United States electrical construction and
facilities services                             $       340,529       21 %   $   318,960       20 %
United States mechanical construction and
facilities services                                     616,403       38 %       593,448       37 %
United States building services                         457,777       28 %       444,510       28 %
United States industrial services                       110,879        7 %       125,412        8 %
Total United States operations                        1,525,588       94 %     1,482,330       92 %
United Kingdom construction and facilities
services                                                103,479        6 %       123,912        8 %
Total worldwide operations                      $     1,629,067      100 %   $ 1,606,242      100 %



                                                      For the nine months ended September 30,
                                                                     % of                     % of
                                                      2013          Total        2012        Total
Revenues:
United States electrical construction and
facilities services                             $       984,443       21 %   $   905,343       19 %
United States mechanical construction and
facilities services                                   1,741,483       37 %     1,794,268       38 %
United States building services                       1,361,392       29 %     1,341,940       28 %
United States industrial services                       335,358        7 %       288,605        6 %
Total United States operations                        4,422,676       93 %     4,330,156       91 %
United Kingdom construction and facilities
services                                                331,545        7 %       404,642        9 %
Total worldwide operations                      $     4,754,221      100 %   $ 4,734,798      100 %

As described below in more detail, our revenues for the three months ended September 30, 2013 increased to $1.63 billion compared to $1.61 billion of revenues for the three months ended September 30, 2012, and our revenues for the nine months ended September 30, 2013 increased to $4.75 billion compared to $4.73 billion for the nine months ended September 30, 2012. The increase in revenues for the three months ended September 30, 2013 was primarily attributable to: (a) higher revenues from our


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United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment and our United States building services segment, excluding acquisitions, and (b) revenues of $47.7 million attributable to companies acquired in 2013, partially offset by lower revenues from our United States industrial services segment and our United Kingdom construction and facilities services segment. The increase in revenues for the nine months ended September 30, 2013 was primarily attributable to: (a) higher revenues from our United States electrical construction and facilities services segment, our United States building services segment and our United States industrial services segment, excluding acquisitions, and (b) revenues of $49.5 million attributable to companies acquired in 2013, partially offset by lower revenues from our United States mechanical construction and facilities services segment and our United Kingdom construction and facilities services segment. We continue to be disciplined by only accepting work in a very competitive marketplace that we believe can be performed at reasonable margins. The following table presents our operating segment backlog from unrelated entities and their respective percentages of total backlog (in thousands, except for percentages):

                                   September 30,     % of     December 31,     % of    September 30,     % of
                                        2013        Total         2012        Total         2012        Total
Backlog:
United States electrical
construction and facilities
services                           $  1,012,121       30 %   $    831,910       25 %   $    713,763       21 %
United States mechanical
construction and facilities
services                              1,358,554       40 %      1,357,892       40 %      1,449,322       43 %
United States building services         753,877       22 %        841,882       25 %        902,900       27 %
United States industrial services        96,021        3 %         99,532        3 %         97,003        3 %
Total United States operations        3,220,573       95 %      3,131,216       93 %      3,162,988       94 %
United Kingdom construction and
facilities services                     172,300        5 %        243,169        7 %        219,185        6 %
Total worldwide operations         $  3,392,873      100 %   $  3,374,385      100 %   $  3,382,173      100 %

Our backlog at September 30, 2013 was $3.39 billion compared to $3.38 billion at September 30, 2012 and $3.37 billion at December 31, 2012. The increase in backlog at September 30, 2013, compared to backlog at September 30, 2012, was primarily attributable to an increase in contracts awarded for work in our United States electrical construction and facilities services segment, partially offset by a decrease in backlog in our: (a) United States building services segment, (b) United States mechanical construction and facilities services segment and (c) United Kingdom 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. We include a project within our backlog at such time as a contract is awarded. 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 provided for in the initial contract award. Our backlog also includes amounts related to facilities services contracts for which a fixed price contract value is not assigned; however, a reasonable estimate of total revenues can be made from budgeted amounts agreed to with our customer. Our backlog is comprised of: (a) original contract amounts, (b) change orders for which we have received written confirmations from our customers, (c) pending change orders for which we expect to receive confirmations in the ordinary course of business and (d) claim amounts that we have made against customers for which we have determined we have a legal basis under existing contractual arrangements and as to which we consider collection to be probable. Claim amounts were immaterial for all periods presented. Our backlog does not include: (a) any quantification or value for time and material contracts as the total revenues to be realized from such projects are difficult to estimate, (b) anticipated revenues from unconsolidated joint ventures or variable interest entities and (c) anticipated revenues from pass-through costs on contracts for which we are acting in the capacity of an agent and which are reported on the net basis. We believe our backlog is firm, although many contracts are subject to cancellation at the election of our customers. Historically, cancellations have not had a material adverse effect on us. Revenues of our United States electrical construction and facilities services segment were $340.5 million and $984.4 million for the three and nine months ended September 30, 2013, respectively, compared to revenues of $319.0 million and $905.3 million for the three and nine months ended September 30, 2012, respectively. The increase in revenues for both periods was primarily attributable to higher levels of work from commercial, institutional and transportation construction projects, primarily in the Los Angeles and New York City markets, partially offset by a decrease in revenues from water and wastewater construction projects. Revenues for the nine months ended September 30, 2013 also benefited from work completed on several large industrial market contracts in multiple geographic areas.


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Our United States mechanical construction and facilities services segment revenues for the three months ended September 30, 2013 were $616.4 million, a $23.0 million increase compared to revenues of $593.4 million for the three months ended September 30, 2012. Revenues of this segment for the nine months ended September 30, 2013 were $1,741.5 million, a $52.8 million decrease compared to revenues of $1,794.3 million for the nine months ended September 30, 2012. The increase in revenues for the three months ended September 30, 2013 was primarily attributable to higher volume from industrial construction projects and revenues of approximately $8.4 million generated by a company acquired in 2013, partially offset by a decrease in revenues from institutional and water and wastewater contracts. The decrease in revenues for the nine months ended September 30, 2013 was primarily attributable to declines in revenues from healthcare, institutional and water and wastewater construction projects, partially offset by an increase in revenues from industrial construction projects and revenues of approximately $10.2 million generated by a company acquired in 2013.
Revenues of our United States building services segment for the three months ended September 30, 2013 increased by $13.3 million compared to the three months ended September 30, 2012, and revenues for the nine months ended September 30, 2013 increased by $19.5 million compared to the nine months ended September 30, 2012. The increase in revenues for both periods was primarily attributable to increased revenues from our energy services and our mobile mechanical services, partially offset by a decrease in revenues from our government site-based services. The increase in revenues for both periods from our energy services was due to large project work, and the increase in revenues for both periods from our mobile mechanical services was due to higher project and services revenues. The decrease in revenues for both periods from our government site-based services was primarily due to a reduction in discretionary government project spending and the loss in 2012 of certain maintenance contracts.
Revenues of our United States industrial services segment for the three months ended September 30, 2013 decreased by $14.5 million compared to the three months ended September 30, 2012, and revenues for the nine months ended September 30, 2013 increased by $46.8 million compared to the nine months ended September 30, 2012. Revenues decreased for the 2013 third quarter despite revenues of approximately $39.3 million generated by a company acquired in 2013. Revenues in the 2012 third quarter were favorably impacted by three large non-recurring turnaround and repair projects that accounted for $49.9 million of revenues. The increase in revenues for the nine months ended September 30, 2013 was primarily due to the $39.3 million of revenues generated by a company acquired in 2013 and an increase in revenues from our industrial shop services operations. Our United Kingdom construction and facilities services segment revenues were $103.5 million and $331.5 million for the three and nine months ended September 30, 2013, respectively, compared to revenues of $123.9 million and $404.6 million for the three and nine months ended September 30, 2012, respectively. The decrease in revenues for both periods was attributable to a decrease in levels of work from its construction operations, as a consequence of both weak market conditions and our decision earlier this year to withdraw from the construction market in the United Kingdom. This decision was based on recurring losses over the last several years in the construction operations of our United Kingdom segment and our negative assessment of construction market conditions in the United Kingdom for the foreseeable future. Revenues for both periods also decreased by $2.0 million and $7.1 million, respectively, 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,
                                                2013             2012             2013             2012
Cost of sales                             $    1,422,757     $ 1,402,994     $   4,175,238     $ 4,156,893
Gross profit                              $      206,310     $   203,248     $     578,983     $   577,905
Gross profit, as a percentage of revenues           12.7 %          12.7 %            12.2 %          12.2 %

Our gross profit increased by $3.1 million for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. Gross profit increased by $1.1 million for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. The increase in gross profit for the three months ended September 30, 2013 was predominantly attributable to improved profitability within our United States building services segment and our United States electrical construction and facilities services segment. The increase in gross profit for the nine months ended September 30, 2013 was primarily attributable to increases in gross profit from our United States building services segment and our United States industrial services segment. Companies acquired in 2013 within our United States industrial services segment and our United States mechanical construction and facilities services segment contributed $6.7 million and $6.8 million to gross profit for the three and nine months ended September 30, 2013, respectively. In addition, the first quarter of 2013 benefited from the receipt of an insurance recovery of approximately $2.6 million associated with a previously disposed of operation, which is classified as a


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component of "Cost of sales" on the Condensed Consolidated Statements of Operations. Gross profit for both periods was negatively impacted by a decrease in gross profit from: (a) our United States mechanical construction and facilities services segment, as a consequence of losses at two projects from one of our subsidiaries located in the southeastern United States of $4.2 million for the three months ended September 30, 2013, resulting in a 0.3% impact on consolidated gross profit margin, and losses of $22.6 million for the nine months ended September 30, 2013, resulting in a 0.5% impact on consolidated gross profit margin, and (b) our United Kingdom construction and facilities services segment.
Our gross profit margin was 12.7% for each of the three months ended September 30, 2013 and 2012. Gross profit margin was 12.2% for each of the nine months ended September 30, 2013 and 2012. Gross profit margin for the three months ended September 30, 2013 increased in our United States building services segment and our United Kingdom construction and facilities services segment and decreased in all our other reportable segments. Gross profit margin for the nine months ended September 30, 2013 increased in our United States building services segment and our United States industrial services segment and decreased in all our other reportable 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         For the nine months ended
                                                       September 30,                      September 30,
                                                    2013              2012             2013             2012
Selling, general and administrative expenses  $     149,722       $  134,477     $     427,855       $ 406,656
Selling, general and administrative expenses,
as a percentage of revenues                             9.2 %            8.4 %             9.0 %           8.6 %

Our selling, general and administrative expenses for the three months ended September 30, 2013 increased by $15.2 million to $149.7 million compared to $134.5 million for the three months ended September 30, 2012. Selling, general and administrative expenses for the nine months ended September 30, 2013 increased by $21.2 million to $427.9 million compared to $406.7 million for the nine months ended September 30, 2012. Selling, general and administrative expenses as a percentage of revenues were 9.2% and 9.0% for the three and nine months ended September 30, 2013, respectively, compared to 8.4% and 8.6% for the three and nine months ended September 30, 2012, respectively. This increase in selling, general and administrative expenses for the three and nine months ended September 30, 2013 primarily resulted from: (a) $8.4 million and $8.7 million, respectively, of expenses directly related to companies acquired in 2013, including amortization expense attributable to identifiable intangible assets of $2.4 million in each period, and (b) $4.7 million and $6.1 million, respectively, of transaction costs associated with the RSI acquisition. Additionally, selling, general and administrative expenses increased for the nine months ended September 30, 2013 compared to the same period in 2012 due to higher employee related costs, such as salaries and accrued incentive compensation at certain of our operating subsidiaries, partially offset by $2.9 million of income attributable to the reversal of contingent consideration accruals relating to acquisitions made prior to 2012. Restructuring expenses
Restructuring expenses were $2.5 million and $9.6 million for the three and nine months ended September 30, 2013, respectively, which primarily related to employee severance obligations and the termination of leased facilities in the construction operations of our United Kingdom construction and facilities services segment, as a result of our decision earlier this year to withdraw from the construction market in the United Kingdom. Restructuring expenses for the three months ended September 30, 2013 included $1.9 million of employee severance obligations and $0.6 million relating to the termination of leased facilities. Restructuring expenses for the nine months ended September 30, 2013 included $8.4 million of employee severance obligations and $1.2 million relating to the termination of leased facilities. 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 building services segment. As of September 30, 2013, the balance of obligations yet to be paid was $4.7 million, the majority of which is expected to be paid through 2014. We expect to incur an additional $3.3 million of expenses in connection with this restructuring through 2014.


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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):

. . .
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