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EME > SEC Filings for EME > Form 10-Q on 29-Jul-2014All Recent SEC Filings

Show all filings for EMCOR GROUP INC

Form 10-Q for EMCOR GROUP INC


29-Jul-2014

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. In addition, we provide a number of building services and industrial services. Our services are provided 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 referred to above. In addition, the segment formally named the United Kingdom construction and facilities services segment has been renamed the United Kingdom construction and building services segment. Overview
The following table presents selected financial data for the three months ended June 30, 2014 and 2013 (in thousands, except percentages and per share data):

                                                For the three months ended
                                                         June 30,
                                                  2014              2013
Revenues                                     $   1,558,055     $ 1,556,753
Revenues increase (decrease) from prior year           0.1 %          (2.1 )%
Operating income                             $      67,736     $    36,099
Operating income as a percentage of revenues           4.3 %           2.3  %
Restructuring expenses                       $         438     $     5,813
Net income attributable to EMCOR Group, Inc. $      39,913     $    21,014
Diluted earnings per common share            $        0.59     $      0.31

Overall revenues, operating income and operating margin (operating income as a percentage of revenues) increased in the 2014 second quarter compared to the 2013 second quarter. The increase in revenues for the second quarter of 2014 was primarily attributable to incremental revenues of $85.7 million generated by 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 effect of these acquisitions, revenues for the second quarter of 2014 decreased due to lower revenues in all of our reportable segments, except for our United States industrial services segment. A portion of the decrease in revenues was attributable to a planned reduction in the scope of activities from: (a) the construction operations of our United Kingdom construction and building services operations and (b) one of our operations reported in our United States mechanical construction and facilities services segment.
Operating income and operating margin increased in all of our reportable segments, except for our United States building services segment. Operating performance improved within our United States mechanical construction and facilities services segment and our United Kingdom construction and building services segment in the second quarter of 2014 when compared to weak performance in the second quarter of 2013 due, in part, to significant project losses incurred in 2013 in these segments. In addition, our United Kingdom construction and building services segment recognized income of $4.8 million in the second quarter of 2014, which has been recorded as a reduction of "Cost of sales" in the Condensed Consolidated Statements of Operations, as a result of a reduction in the estimate of certain accrued contract costs that were no longer expected to be incurred within its building services operations. Companies acquired in 2013, which are reported in our United States industrial segment and our United States mechanical construction and facilities services segment, contributed $2.4 million to operating income, net of $3.5 million of amortization expense associated with identifiable intangible assets for the second quarter of 2014.


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Operating Segments
We have the following reportable segments which provide services associated with the design, integration, installation, start-up, operation and maintenance of various systems: (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 building 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, including commercial and government site-based operations and maintenance; facility maintenance and services; outage services to utilities and industrial plants; military base operations support services; mobile maintenance and services; floor care and janitorial services; landscaping, lot sweeping and snow removal; facilities management; vendor management; call center services; installation and support for building systems; program development, management and maintenance for energy systems; technical consulting and diagnostic services; infrastructure and building projects for federal, state and local governmental agencies and bodies; small modification and retrofit projects; and retrofit projects to comply with clean air laws, which services are not generally related to customers' construction programs. The segment "United States industrial services" principally consists of those operations which provide industrial maintenance and services, including those for refineries and petrochemical plants, including on-site repairs, maintenance and service of heat exchangers, towers, vessels and piping; design, manufacturing, repair and hydro blast cleaning of shell and tube heat exchangers and related equipment; refinery turnaround planning and engineering services; specialty welding services; overhaul and maintenance of critical process units in refineries and petrochemical plants; and specialty technical services for refineries and petrochemical plants. The United Kingdom construction and building services segment performs electrical construction, mechanical construction and building 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 two other acquisitions during 2013, and their results have been included in our United States mechanical construction and facilities services segment. These acquired businesses expanded our service capabilities into new technical areas. Results of Operations
Revenues
The following table presents our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages):

                                                         For the three months ended June 30,
                                                                       % of                     % of
                                                       2014           Total        2013        Total
Revenues:
United States electrical construction and
facilities services                             $      335,492          22 %   $   336,330       22 %
United States mechanical construction and
facilities services                                    538,556          35 %       583,963       38 %
United States building services                        418,142          27 %       448,459       29 %
United States industrial services                      177,232          11 %        78,935        5 %
Total United States operations                       1,469,422          94 %     1,447,687       93 %
United Kingdom construction and building
services                                                88,633           6 %       109,066        7 %
Total worldwide operations                      $    1,558,055         100 %   $ 1,556,753      100 %


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                                                        For the six months ended June 30,
                                                                   % of                     % of
                                                     2014         Total        2013        Total
Revenues:
United States electrical construction and
facilities services                             $     643,628       20 %   $   643,914       21 %
United States mechanical construction and
facilities services                                 1,051,567       33 %     1,125,080       36 %
United States building services                       866,186       27 %       903,615       29 %
United States industrial services                     409,190       13 %       224,479        7 %
Total United States operations                      2,970,571       94 %     2,897,088       93 %
United Kingdom construction and building
services                                              186,869        6 %       228,066        7 %
Total worldwide operations                      $   3,157,440      100 %   $ 3,125,154      100 %

As described below in more detail, our revenues were approximately $1.56 billion for each of the three months ended June 30, 2014 and 2013, and our revenues for the six months ended June 30, 2014 increased to $3.16 billion compared to $3.13 billion for the six months ended June 30, 2013. The slight increase in revenues for the three months ended June 30, 2014 was primarily attributable to: (a) revenues of $85.7 million attributable to companies acquired in 2013 and (b) higher revenues from our United States industrial services segment. This increase was partially offset by lower revenues from all of our other reportable segments, excluding the impact of acquisitions. The increase in revenues for the six months ended June 30, 2014 was primarily attributable to revenues of $204.7 million attributable to companies acquired in 2013. This increase was partially offset by lower revenues from all of our reportable segments, excluding the impact of acquisitions. We continue to be disciplined in a very competitive marketplace by only accepting work that we believe can be performed at reasonable margins.
Revenues of our United States electrical construction and facilities services segment were $335.5 million and $643.6 million for the three and six months ended June 30, 2014, respectively, compared to revenues of $336.3 million and $643.9 million for the three and six months ended June 30, 2013, respectively. The slight decrease in revenues for both periods was primarily attributable to a decrease in revenues from institutional, manufacturing and water and wastewater construction projects, primarily in the southern California and New York markets. These decreases were partially offset by higher levels of work from commercial, transportation and healthcare projects.
Our United States mechanical construction and facilities services segment revenues for the three months ended June 30, 2014 were $538.6 million, a $45.4 million decrease compared to revenues of $584.0 million for the three months ended June 30, 2013. Revenues of this segment for the six months ended June 30, 2014 were $1,051.6 million, a $73.5 million decrease compared to revenues of $1,125.1 million for the six months ended June 30, 2013. The decrease in revenues for the three and six months ended June 30, 2014 was primarily attributable to declines in revenues from manufacturing and institutional construction projects, partially offset by: (a) an increase in revenues from healthcare and hospitality construction projects and (b) incremental revenues of $7.1 million and $15.5 million, respectively, generated by companies acquired in 2013. The decrease in revenues was also partially attributable to a planned reduction in the scope of activities from one of our operations located in the southeastern United States.
Revenues of our United States building services segment for the three months ended June 30, 2014 decreased by $30.3 million compared to the three months ended June 30, 2013, and revenues for the six months ended June 30, 2014 decreased by $37.4 million compared to the six months ended June 30, 2013. The decrease in revenues for both periods was primarily attributable to decreased revenues from: (a) our energy services, due to a reduction of large project work, and (b) our commercial site-based services, partially as a result of a large contract that was terminated by agreement of the parties. In addition, the decrease in revenues for the six months ended June 30, 2014 was partially attributable to lower levels of project activity in certain of our mobile mechanical services operations.
Revenues of our United States industrial services segment for the three months ended June 30, 2014 increased by $98.3 million compared to the three months ended June 30, 2013, and revenues for the six months ended June 30, 2014 increased by $184.7 million compared to the six months ended June 30, 2013. The increase in revenues for the three and six months ended June 30, 2014 was primarily due to: (a) incremental revenues of $78.6 million and $189.2 million, respectively, generated by RSI, and (b) increased demand for our industrial field services operations. The increase in revenues for the six months ended June 30, 2014 was partially offset by a decrease in revenues from our industrial shop services operations.
Our United Kingdom construction and building services segment revenues were $88.6 million for the three months ended June 30, 2014 compared to revenues of $109.1 million for the three months ended June 30, 2013, and revenues were $186.9 million for the six months ended June 30, 2014 compared to revenues of $228.1 million for the six months ended June 30, 2013. The decrease in revenues for the three and six months ended June 30, 2014 was attributable to a decrease in levels of work from its


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construction operations, as a consequence of our decision last year to withdraw from the construction market in the United Kingdom, partially offset by an increase of $7.7 million and $14.1 million, respectively, relating to the effect of favorable exchange rates for the British pound versus the United States dollar. Revenues also declined within this segment's building services operations as a result of reduced activity in the transportation and commercial markets.
Backlog
The following table presents our operating segment backlog from unrelated entities and their respective percentages of total backlog (in thousands, except for percentages):

                                                        % of     December 31,     % of                         % of
                                     June 30, 2014     Total         2013        Total      June 30, 2013     Total
Backlog:
United States electrical
construction and facilities
services                           $     1,100,734       30 %   $    993,919       30 %   $       963,033       27 %
United States mechanical
construction and facilities
services                                 1,508,336       41 %      1,325,941       39 %         1,449,606       41 %
United States building services            750,025       21 %        761,855       23 %           813,770       23 %
United States industrial services          100,878        3 %         94,187        3 %            95,297        3 %
Total United States operations           3,459,973       95 %      3,175,902       94 %         3,321,706       95 %
United Kingdom construction and
building services                          176,520        5 %        185,220        6 %           189,451        5 %
Total worldwide operations         $     3,636,493      100 %   $  3,361,122      100 %   $     3,511,157      100 %

Our backlog at June, 2014 was $3.64 billion compared to $3.51 billion at June 30, 2013 and $3.36 billion at December 31, 2013. The increase in backlog at June 30, 2014 compared to backlog at December 31, 2013 was primarily attributable to an increase in contracts awarded for work in our (a) United States mechanical construction and facilities services segment and (b) United States electrical 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 services contracts. However, we do not include in backlog contracts for which we are paid on a time and material basis, and if the remaining term of a 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 services contracts for which a fixed price contract value is not assigned when 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 recovery to be probable. Such claim amounts were immaterial for all periods presented. Our backlog does not include anticipated revenues from unconsolidated joint ventures or variable interest entities and 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.
Cost of sales and Gross profit
The following table presents 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 six months ended
                                                      June 30,                          June 30,
                                                2014             2013             2014            2013
Cost of sales                             $    1,338,420     $ 1,375,218     $  2,722,594     $ 2,752,481
Gross profit                              $      219,635     $   181,535     $    434,846     $   372,673
Gross profit, as a percentage of revenues           14.1 %          11.7 %           13.8 %          11.9 %


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Our gross profit increased by $38.1 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Gross profit increased by $62.2 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase in gross profit for both periods was attributable to improved profitability within all of our reportable segments, except for our United States building services segment for the second quarter of 2014. Companies acquired in 2013 included in our United States industrial services segment and our United States mechanical construction and facilities services segment contributed an aggregate of $13.3 million and $32.4 million to gross profit for the three and six months ended June 30, 2014, respectively. Our gross profit margin was 14.1% and 11.7% for the three months ended June 30, 2014 and 2013, respectively. Gross profit margin was 13.8% and 11.9% for the six months ended June 30, 2014 and 2013, respectively. Increases in gross profit margin within our domestic construction segments, our United States building services segment and our United Kingdom construction and building services segment were partially offset by decreased gross profit margin with our United States industrial services segment. Gross profit margin for the first half of 2013 was adversely impacted by a significant project write-down reported in our United States mechanical construction and facilities services segment. Selling, general and administrative expenses The following table presents 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 six months ended
                                                          June 30,                          June 30,
                                                    2014              2013            2014             2013
Selling, general and administrative expenses  $     151,461       $  139,623     $    296,389       $ 278,133
Selling, general and administrative expenses,
as a percentage of revenues                             9.7 %            9.0 %            9.4 %           8.9 %

Our selling, general and administrative expenses for the three months ended June 30, 2014 increased by $11.8 million to $151.5 million compared to $139.6 million for the three months ended June 30, 2013. Selling, general and administrative expenses for the six months ended June 30, 2014 increased by $18.3 million to $296.4 million compared to $278.1 million for the six months ended June 30, 2013. Selling, general and administrative expenses as a percentage of revenues were 9.7% and 9.4% for the three and six months ended June 30, 2014, respectively, compared to 9.0% and 8.9% for the three and six months ended June 30, 2013, respectively. This increase in selling, general and administrative expenses for the three and six months ended June 30, 2014 primarily resulted from $10.9 million and $22.6 million of expenses directly related to companies acquired in 2013, including amortization expense of $3.5 million and $7.0 million attributable to identifiable intangible assets, respectively. Additionally, selling, general and administrative expenses for the three months ended June 30, 2014 increased due to an increase in certain employee related costs such as employee benefits. Selling, general and administrative expenses for the three and six months ended June 30, 2013 included $1.4 million of transaction costs associated with the acquisition of RSI. Restructuring expenses
Restructuring expenses were $0.4 million and $1.3 million for the three and six months ended June 30, 2014, respectively. Restructuring expenses for the three months ended June 30, 2014 included $0.4 million of employee severance obligations. Restructuring expenses for the six months ended June 30, 2014 included $1.1 million of employee severance obligations and $0.2 million relating to the termination of leased facilities. Restructuring expenses were $5.8 million and $7.2 million for the three and six months ended June 30, 2013, respectively. Restructuring expenses for the three months ended June 30, 2013 included $5.2 million of employee severance obligations and $0.6 million relating to the termination of leased facilities. Restructuring expenses for the six months ended June 30, 2013 included $6.6 million of employee severance obligations and $0.6 million relating to the termination of leased facilities. As of June 30, 2014, the balance of these restructuring obligations yet to be paid was $3.9 million, the majority of which is expected to be paid in 2014. We expect to incur an additional $0.5 million of expenses in connection with restructuring through 2014.


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Operating income
The following table presents 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 June 30,
                                                                     % of                      % of
                                                                   Segment                    Segment
                                                     2014          Revenues       2013       Revenues
Operating income (loss):
United States electrical construction and
facilities services                             $    24,841           7.4 %    $  25,236        7.5  %
United States mechanical construction and
facilities services                                  28,740           5.3 %       18,248        3.1  %
United States building services                      13,920           3.3 %       16,763        3.7  %
United States industrial services                    12,376           7.0 %        3,265        4.1  %
Total United States operations                       79,877           5.4 %       63,512        4.4  %
United Kingdom construction and building
services                                              4,541           5.1 %       (4,537 )     (4.2 )%
Corporate administration                            (16,244 )           -        (17,063 )        -
Restructuring expenses                                 (438 )           -         (5,813 )        -
Total worldwide operations                           67,736           4.3 %       36,099        2.3  %
Other corporate items:
Interest expense                                     (2,242 )                     (1,764 )
Interest income                                         221                          270
Income before income taxes                      $    65,715                    $  34,605


                                                         For the six months ended June 30,
                                                                   % of                      % of
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