EME-2014.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to Commission file number 1-8267
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EMCOR GROUP, INC. |
(Exact Name of Registrant as Specified in Its Charter) |
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| | |
Delaware | | 11-2125338 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
| | |
301 Merritt Seven Norwalk, Connecticut | | 06851-1092 |
(Address of Principal Executive Offices) | | (Zip Code) |
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(203) 849-7800 |
(Registrant’s Telephone Number, Including Area Code) |
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N/A |
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | x | Accelerated filer | o |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
Applicable Only To Corporate Issuers
Number of shares of Common Stock outstanding as of the close of business on July 24, 2014: 67,031,529 shares.
EMCOR Group, Inc.
INDEX
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 2. | | |
Item 4. | | |
Item 6. | | |
PART I. – FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) |
| | | | | | | |
| June 30, 2014 (Unaudited) | | December 31, 2013 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 437,119 |
| | $ | 439,813 |
|
Accounts receivable, net | 1,203,666 |
| | 1,268,226 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts | 110,267 |
| | 90,727 |
|
Inventories | 58,251 |
| | 52,123 |
|
Prepaid expenses and other | 78,530 |
| | 79,216 |
|
Total current assets | 1,887,833 |
| | 1,930,105 |
|
Investments, notes and other long-term receivables | 8,792 |
| | 6,799 |
|
Property, plant and equipment, net | 121,376 |
| | 123,414 |
|
Goodwill | 834,102 |
| | 834,825 |
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Identifiable intangible assets, net | 522,493 |
| | 541,497 |
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Other assets | 30,299 |
| | 29,275 |
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Total assets | $ | 3,404,895 |
| | $ | 3,465,915 |
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LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Borrowings under revolving credit facility | $ | — |
| | $ | — |
|
Current maturities of long-term debt and capital lease obligations | 19,184 |
| | 19,332 |
|
Accounts payable | 399,926 |
| | 487,738 |
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Billings in excess of costs and estimated earnings on uncompleted contracts | 380,781 |
| | 381,295 |
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Accrued payroll and benefits | 206,889 |
| | 237,779 |
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Other accrued expenses and liabilities | 177,759 |
| | 172,599 |
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Total current liabilities | 1,184,539 |
| | 1,298,743 |
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Borrowings under revolving credit facility | — |
| | — |
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Long-term debt and capital lease obligations | 326,084 |
| | 335,331 |
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Other long-term obligations | 346,781 |
| | 352,215 |
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Total liabilities | 1,857,404 |
| | 1,986,289 |
|
Equity: | | | |
EMCOR Group, Inc. stockholders' equity: | | | |
Preferred stock, $0.01 par value, 1,000,000 shares authorized, zero issued and outstanding | — |
| | — |
|
Common stock, $0.01 par value, 200,000,000 shares authorized, 67,711,975 and 67,627,359 shares issued, respectively | 677 |
| | 676 |
|
Capital surplus | 404,147 |
| | 408,083 |
|
Accumulated other comprehensive loss | (64,815 | ) | | (65,777 | ) |
Retained earnings | 1,204,155 |
| | 1,133,873 |
|
Treasury stock, at cost 659,841 and 730,841 shares, respectively | (10,302 | ) | | (10,590 | ) |
Total EMCOR Group, Inc. stockholders’ equity | 1,533,862 |
| | 1,466,265 |
|
Noncontrolling interests | 13,629 |
| | 13,361 |
|
Total equity | 1,547,491 |
| | 1,479,626 |
|
Total liabilities and equity | $ | 3,404,895 |
| | $ | 3,465,915 |
|
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenues | $ | 1,558,055 |
| | $ | 1,556,753 |
| | $ | 3,157,440 |
| | $ | 3,125,154 |
|
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 |
|
Selling, general and administrative expenses | 151,461 |
| | 139,623 |
| | 296,389 |
| | 278,133 |
|
Restructuring expenses | 438 |
| | 5,813 |
| | 1,347 |
| | 7,176 |
|
Operating income | 67,736 |
| | 36,099 |
| | 137,110 |
| | 87,364 |
|
Interest expense | (2,242 | ) | | (1,764 | ) | | (4,490 | ) | | (3,626 | ) |
Interest income | 221 |
| | 270 |
| | 455 |
| | 627 |
|
Income before income taxes | 65,715 |
| | 34,605 |
| | 133,075 |
| | 84,365 |
|
Income tax provision | 24,715 |
| | 13,131 |
| | 50,233 |
| | 32,173 |
|
Net income including noncontrolling interests | 41,000 |
| | 21,474 |
| | 82,842 |
| | 52,192 |
|
Less: Net income attributable to noncontrolling interests | (1,087 | ) | | (460 | ) | | (1,668 | ) | | (1,011 | ) |
Net income attributable to EMCOR Group, Inc. | $ | 39,913 |
| | $ | 21,014 |
| | $ | 81,174 |
| | $ | 51,181 |
|
Basic earnings per common share: | | | | | | | |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 0.59 |
| | $ | 0.31 |
| | $ | 1.21 |
| | $ | 0.76 |
|
Diluted earnings per common share: | | | | | | | |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 0.59 |
| | $ | 0.31 |
| | $ | 1.19 |
| | $ | 0.75 |
|
| | | | | | | |
Dividends declared per common share | $ | 0.08 |
| | $ | 0.06 |
| | $ | 0.16 |
| | $ | 0.06 |
|
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Net income including noncontrolling interests | $ | 41,000 |
| | $ | 21,474 |
| | $ | 82,842 |
| | $ | 52,192 |
|
Other comprehensive income, net of tax: | | | | | | | |
Foreign currency translation adjustments | 64 |
| | 102 |
| | 66 |
| | 28 |
|
Post retirement plans, amortization of actuarial loss included in net income (1) | 453 |
| | 549 |
| | 896 |
| | 1,103 |
|
Other comprehensive income | 517 |
| | 651 |
| | 962 |
| | 1,131 |
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Comprehensive income | 41,517 |
| | 22,125 |
| | 83,804 |
| | 53,323 |
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Less: Comprehensive income attributable to noncontrolling interests | (1,087 | ) | | (460 | ) | | (1,668 | ) | | (1,011 | ) |
Comprehensive income attributable to EMCOR Group, Inc. | $ | 40,430 |
| | $ | 21,665 |
| | $ | 82,136 |
| | $ | 52,312 |
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_________
| |
(1) | Net of tax of $0.1 million and $0.2 million for the three months ended June 30, 2014 and 2013, respectively, and net of tax of $0.3 million and $0.4 million for the six months ended June 30, 2014 and 2013, respectively. |
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)(Unaudited)
|
| | | | | | | |
| Six months ended June 30, |
| 2014 | | 2013 |
Cash flows - operating activities: | | | |
Net income including noncontrolling interests | $ | 82,842 |
| | $ | 52,192 |
|
Depreciation and amortization | 17,956 |
| | 16,895 |
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Amortization of identifiable intangible assets | 19,005 |
| | 12,687 |
|
Deferred income taxes | 4,648 |
| | (436 | ) |
Loss on sale of subsidiary | 608 |
| | — |
|
Excess tax benefits from share-based compensation | (5,627 | ) | | (994 | ) |
Equity income from unconsolidated entities | (836 | ) | | (240 | ) |
Other non-cash items | 3,185 |
| | 2,417 |
|
Distributions from unconsolidated entities | 572 |
| | 634 |
|
Changes in operating assets and liabilities, excluding the effect of businesses acquired | (82,713 | ) | | (135,366 | ) |
Net cash provided by (used in) operating activities | 39,640 |
| | (52,211 | ) |
Cash flows - investing activities: | | | |
Payments for acquisitions of businesses, net of cash acquired | — |
| | (1,050 | ) |
Proceeds from sale of subsidiary | 1,108 |
| | — |
|
Proceeds from sale of property, plant and equipment | 2,630 |
| | 861 |
|
Purchase of property, plant and equipment | (16,579 | ) | | (14,820 | ) |
Maturity of short-term investments | — |
| | 4,616 |
|
Investments in and advances to unconsolidated entities and joint ventures | (1,590 | ) | | — |
|
Net cash used in investing activities | (14,431 | ) | | (10,393 | ) |
Cash flows - financing activities: | | | |
Repayments of long-term debt | (8,756 | ) | | (4 | ) |
Repayments of capital lease obligations | (840 | ) | | (786 | ) |
Dividends paid to stockholders | (10,743 | ) | | (4,027 | ) |
Repurchase of common stock | (18,332 | ) | | (4,998 | ) |
Proceeds from exercise of stock options | 4,533 |
| | 1,933 |
|
Payments to satisfy minimum tax withholding | (1,481 | ) | | (927 | ) |
Issuance of common stock under employee stock purchase plan | 1,753 |
| | 1,344 |
|
Payments for contingent consideration arrangements | — |
| | (537 | ) |
Distributions to noncontrolling interests | (1,400 | ) | | (1,050 | ) |
Excess tax benefits from share-based compensation | 5,627 |
| | 994 |
|
Net cash used in financing activities | (29,639 | ) | | (8,058 | ) |
Effect of exchange rate changes on cash and cash equivalents | 1,736 |
| | (4,256 | ) |
Decrease in cash and cash equivalents | (2,694 | ) | | (74,918 | ) |
Cash and cash equivalents at beginning of year | 439,813 |
| | 605,303 |
|
Cash and cash equivalents at end of period | $ | 437,119 |
| | $ | 530,385 |
|
Supplemental cash flow information: | | | |
Cash paid for: | | | |
Interest | $ | 3,388 |
| | $ | 2,730 |
|
Income taxes | $ | 46,298 |
| | $ | 68,147 |
|
Non-cash financing activities: | | | |
Assets acquired under capital lease obligations | $ | 93 |
| | $ | 352 |
|
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | EMCOR Group, Inc. Stockholders | | |
| Total | | Common stock | | Capital surplus | | Accumulated other comprehensive (loss) income (1) | | Retained earnings | | Treasury stock | | Noncontrolling interests |
Balance, December 31, 2012 | $ | 1,357,179 |
| | $ | 680 |
| | $ | 416,104 |
| | $ | (81,040 | ) | | $ | 1,022,239 |
| | $ | (11,903 | ) | | $ | 11,099 |
|
Net income including noncontrolling interests | 52,192 |
| | — |
| | — |
| | — |
| | 51,181 |
| | — |
| | 1,011 |
|
Other comprehensive income | 1,131 |
| | — |
| | — |
| | 1,131 |
| | — |
| | — |
| | — |
|
Common stock issued under share-based compensation plans (2) | 1,975 |
| | 2 |
| | 1,849 |
| | — |
| | — |
| | 124 |
| | — |
|
Common stock issued under employee stock purchase plan | 1,344 |
| | — |
| | 1,344 |
| | — |
| | — |
| | — |
| | — |
|
Common stock dividends | (4,027 | ) | | — |
| | 40 |
| | — |
| | (4,067 | ) | | — |
| | — |
|
Repurchase of common stock | (4,998 | ) | | (1 | ) | | (4,997 | ) | | — |
| | — |
| | — |
| | — |
|
Distributions to noncontrolling interests | (1,050 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,050 | ) |
Share-based compensation expense | 3,714 |
| | — |
| | 3,714 |
| | — |
| | — |
| | — |
| | — |
|
Balance, June 30, 2013 | $ | 1,407,460 |
| | $ | 681 |
| | $ | 418,054 |
| | $ | (79,909 | ) | | $ | 1,069,353 |
| | $ | (11,779 | ) | | $ | 11,060 |
|
Balance, December 31, 2013 | $ | 1,479,626 |
| | $ | 676 |
| | $ | 408,083 |
| | $ | (65,777 | ) | | $ | 1,133,873 |
| | $ | (10,590 | ) | | $ | 13,361 |
|
Net income including noncontrolling interests | 82,842 |
| | — |
| | — |
| | — |
| | 81,174 |
| | — |
| | 1,668 |
|
Other comprehensive income | 962 |
| | — |
| | — |
| | 962 |
| | — |
| | — |
| | — |
|
Common stock issued under share-based compensation plans (2) | 8,707 |
| | 5 |
| | 8,414 |
| | — |
| | — |
| | 288 |
| | — |
|
Common stock issued under employee stock purchase plan | 1,753 |
| | — |
| | 1,753 |
| | — |
| | — |
| | — |
| | — |
|
Common stock dividends | (10,743 | ) | | — |
| | 149 |
| | — |
| | (10,892 | ) | | — |
| | — |
|
Repurchase of common stock | (18,724 | ) | | (4 | ) | | (18,720 | ) | | — |
| | — |
| | — |
| | — |
|
Distributions to noncontrolling interests | (1,400 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,400 | ) |
Share-based compensation expense | 4,468 |
| | — |
| | 4,468 |
| | — |
| | — |
| | — |
| | — |
|
Balance, June 30, 2014 | $ | 1,547,491 |
| | $ | 677 |
| | $ | 404,147 |
| | $ | (64,815 | ) | | $ | 1,204,155 |
| | $ | (10,302 | ) | | $ | 13,629 |
|
| |
(1) | Represents cumulative foreign currency translation adjustments and post retirement liability adjustments. |
| |
(2) | Includes the tax benefit associated with share-based compensation of $5.7 million and $1.0 million for the six months ended June 30, 2014 and 2013, respectively. |
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to the Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Consequently, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. References to the “Company,” “EMCOR,” “we,” “us,” “our” and similar words refer to EMCOR Group, Inc. and its consolidated subsidiaries unless the context indicates otherwise. Readers of this report should refer to the consolidated financial statements and the notes thereto included in our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission.
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of a normal recurring nature) necessary to present fairly our financial position and the results of our operations. The results of operations for the three months ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014.
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.
NOTE 2 New Accounting Pronouncements
In May 2014, an accounting pronouncement was issued by the Financial Accounting Standards Board ("FASB") to clarify existing guidance on revenue recognition. This guidance includes the required steps to achieve the core principle that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This pronouncement is effective for fiscal years and interim periods beginning after December 15, 2016, with no early adoption permitted. The guidance permits the use of one of two retrospective transition methods. We have not yet selected a transition method nor have we determined the effect that the adoption of the pronouncement may have on our financial position and/or results of operations.
NOTE 3 Acquisitions of Businesses
On July 29, 2013, we completed the acquisition of RSI. This acquisition expands and strengthens our service offerings to new and existing customers and enhances our position within the industrial services and energy market sectors. Under the terms of the transaction, we acquired 100% of RSI's stock for total consideration of $463.6 million. The acquisition was funded with cash on hand and $250.0 million from borrowings under our revolving credit facility. This acquisition was accounted for using the acquisition method of accounting. We acquired working capital of $35.5 million and other net liabilities of $67.1 million, and have preliminarily ascribed $267.8 million to goodwill and $227.4 million to identifiable intangible assets in connection with the acquisition of RSI, which has been included in our United States industrial services segment. We expect that $49.0 million of acquired goodwill will be deductible for tax purposes. We have completed the final allocation of the purchase price related to the RSI acquisition.
On December 2, 2013 and May 31, 2013, we acquired two companies, each for an immaterial amount. These companies primarily provide mechanical construction services and have been included in our United States mechanical construction and facilities services segment. The purchase price accounting for the acquisition of these businesses was finalized with an insignificant impact during 2013. The acquisition of these businesses was accounted for by the acquisition method, and the prices paid for them have been allocated to their respective assets and liabilities, based upon the estimated fair values of their respective assets and liabilities at the date of their respective acquisitions. We believe these businesses further expand our service capabilities into new geographical and/or technical areas.
During the three months ended June 30, 2014 and 2013, respectively, we recorded a reversal of $0.2 million and $2.4 million of liabilities resulting in non-cash income attributable to contingent consideration arrangements relating to prior acquisitions. During the six months ended June 30, 2014 and 2013, respectively, we recorded a net reversal of $0.2 million and $2.9 million of liabilities resulting in non-cash income attributable to contingent consideration arrangements relating to prior acquisitions.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 4 Disposition of Assets
In January 2014, we sold a subsidiary reported in our United States building services segment. Proceeds from the sale totaled approximately $1.1 million. Included in net income for the six months ended June 30, 2014 was a loss of $0.6 million from this sale, which is classified as a component of "Selling, general and administrative expenses" in the Condensed Consolidated Statements of Operations.
NOTE 5 Earnings Per Share
Calculation of Basic and Diluted Earnings per Common Share
The following tables summarize our calculation of Basic and Diluted Earnings per Common Share (“EPS”) for the three and six months ended June 30, 2014 and 2013 (in thousands, except share and per share data):
|
| | | | | | | |
| For the three months ended June 30, |
| 2014 | | 2013 |
Numerator: | | | |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 39,913 |
| | $ | 21,014 |
|
Denominator: | | | |
Weighted average shares outstanding used to compute basic earnings per common share | 67,294,498 |
| | 67,095,447 |
|
Effect of dilutive securities—Share-based awards | 705,863 |
| | 1,000,130 |
|
Shares used to compute diluted earnings per common share | 68,000,361 |
| | 68,095,577 |
|
Basic earnings per common share: | | | |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 0.59 |
| | $ | 0.31 |
|
Diluted earnings per common share: | | | |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 0.59 |
| | $ | 0.31 |
|
|
| | | | | | | |
| For the six months ended June 30, |
| 2014 | | 2013 |
Numerator: | | | |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 81,174 |
| | $ | 51,181 |
|
Denominator: | | | |
Weighted average shares outstanding used to compute basic earnings per common share | 67,242,392 |
| | 67,102,530 |
|
Effect of dilutive securities—Share-based awards | 758,358 |
| | 994,459 |
|
Shares used to compute diluted earnings per common share | 68,000,750 |
| | 68,096,989 |
|
Basic earnings per common share: | | | |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 1.21 |
| | $ | 0.76 |
|
Diluted earnings per common share: | | | |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 1.19 |
| | $ | 0.75 |
|
There were no anti-dilutive stock options for the three and six months ended June 30, 2014 and 2013, respectively.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 6 Inventories
Inventories in the accompanying Condensed Consolidated Balance Sheets consisted of the following amounts (in thousands):
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Raw materials and construction materials | $ | 34,773 |
| | $ | 32,795 |
|
Work in process | 23,478 |
| | 19,328 |
|
| $ | 58,251 |
| | $ | 52,123 |
|
NOTE 7 Debt
Debt in the accompanying Condensed Consolidated Balance Sheets consisted of the following amounts (in thousands):
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Term Loan | $ | 341,250 |
| | $ | 350,000 |
|
Capitalized lease obligations | 4,011 |
| | 4,652 |
|
Other | 7 |
| | 11 |
|
| 345,268 |
| | 354,663 |
|
Less: current maturities | 19,184 |
| | 19,332 |
|
| $ | 326,084 |
| | $ | 335,331 |
|
Credit Facilities
Until November 25, 2013, we had a revolving credit agreement (the "2011 Credit Agreement") as amended, which provided for a revolving credit facility of $750.0 million. The 2011 Credit Agreement was effective November 21, 2011. Effective November 25, 2013, we amended and restated the 2011 Credit Agreement to provide for a $750.0 million revolving credit facility (the “2013 Revolving Credit Facility”) and a $350.0 million term loan (the "Term Loan") (collectively referred to as the "2013 Credit Agreement") expiring November 25, 2018. The proceeds of the Term Loan were used to repay amounts drawn under the 2011 Credit Agreement. We may increase the 2013 Revolving Credit Facility to $1.05 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $250.0 million of available borrowings under the 2013 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries. The 2013 Credit Agreement is guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets and most of the assets of most of our subsidiaries. The 2013 Revolving Credit Facility and the Term Loan contain various covenants providing for, among other things, maintenance of certain financial ratios and certain limitations on payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. A commitment fee is payable on the average daily unused amount of the 2013 Revolving Credit Facility, which ranges from 0.20% to 0.30%, based on certain financial tests. The fee is 0.20% of the unused amount as of June 30, 2014. Borrowings under the 2013 Credit Agreement bear interest at (1) a rate which is the prime commercial lending rate announced by Bank of Montreal from time to time (3.25% at June 30, 2014) plus 0.25% to 0.75%, based on certain financial tests or (2) United States dollar LIBOR (0.15% at June 30, 2014) plus 1.25% to 1.75%, based on certain financial tests. The interest rate in effect at June 30, 2014 was 1.40%. Letter of credit fees issued under the 2013 Revolving Credit Facility range from 1.25% to 1.75% of the respective face amounts of outstanding letters of credit and are computed based on certain financial tests. We capitalized approximately $3.0 million of debt issuance costs associated with the 2013 Credit Agreement. This amount is being amortized over the life of the agreement and is included as part of interest expense. We are required to make principal payments on the Term Loan in installments on the last day of March, June, September and December of each year, which commenced with the calendar quarter ended March 31, 2014, in the amount of $4.4 million, with a payment of all unpaid principal and interest due on November 25, 2018. As of June 30, 2014, the balance of the Term Loan was $341.3 million. As of June 30, 2014 and December 31, 2013, we had approximately $92.4 million and $83.3 million of letters of credit outstanding, respectively. There were no borrowings outstanding under the 2013 Revolving Credit Facility as of June 30, 2014.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 8 Fair Value Measurements
We use a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy, which gives the highest priority to quoted prices in active markets, is comprised of the following three levels:
Level 1 – Unadjusted quoted market prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs, other than Level 1 inputs. Level 2 inputs would typically include quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3 – Prices or valuations that require inputs that are both significant to the measurement and unobservable.
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):
|
| | | | | | | | | | | | | |
| Assets at Fair Value as of June 30, 2014 |
Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents (1) | $ | 437,119 |
| | — |
| | — |
| | $ | 437,119 |
|
Restricted cash (2) | 7,263 |
| | — |
| | — |
| | 7,263 |
|
Total | $ | 444,382 |
| | — |
| | — |
| | $ | 444,382 |
|
|
| | | | | | | | | | | | | |
| Assets at Fair Value as of December 31, 2013 |
Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents (1) | $ | 439,813 |
| | — |
| | — |
| | $ | 439,813 |
|
Restricted cash (2) | 6,934 |
| | — |
| | — |
| | 6,934 |
|
Total | $ | 446,747 |
| | — |
| | — |
| | $ | 446,747 |
|
________
| |
(1) | Cash and cash equivalents include money market funds with original maturity dates of three months or less, which are Level 1 assets. At June 30, 2014 and December 31, 2013, we had $168.5 million and $147.7 million, respectively, in money market funds. |
| |
(2) | Restricted cash is classified as “Prepaid expenses and other” in the Condensed Consolidated Balance Sheets. |
We believe that the carrying values of our financial instruments, which include accounts receivable and other financing commitments, approximate their fair values due primarily to their short-term maturities and low risk of counterparty default. The carrying value of our 2013 Credit Agreement approximates the fair value due to the variable rate on such debt.
NOTE 9 Income Taxes
For the three months ended June 30, 2014 and 2013, our income tax provision was $24.7 million and $13.1 million, respectively, based on effective income tax rates, before discrete items and less amounts attributable to noncontrolling interests, of 38.0% and 40.7%, respectively. The actual income tax rates on income before income taxes, less amounts attributable to noncontrolling interests, for the three months ended June 30, 2014 and 2013, inclusive of discrete items, were 38.0% and 38.5%, respectively. For the six months ended June 30, 2014 and 2013, our income tax provision was $50.2 million and $32.2 million, respectively, based on effective income tax rates, before discrete items and less amounts attributable to noncontrolling interests, of 38.0% and 39.4%, respectively. The actual income tax rates on income before income taxes, less amounts attributable to noncontrolling interests, for the six months ended June 30, 2014 and 2013, inclusive of discrete items, were 38.1% and 38.6%, respectively. The increase in the 2014 income tax provision was primarily due to increased income before income taxes.
As of June 30, 2014 and December 31, 2013, the amount of unrecognized income tax benefits was $2.4 million and $3.1 million (of which $0.9 million and $1.7 million, if recognized, would favorably affect our effective income tax rate, respectively.)
We report interest expense related to unrecognized income tax benefits in the income tax provision. As of June 30, 2014 and December 31, 2013, we had approximately $0.3 million of accrued interest related to unrecognized income tax benefits included as a liability in the Condensed Consolidated Balance Sheets. For the three months ended June 30, 2014 and 2013, less than $0.1 million and $0.2 million of interest expense was recognized, respectively. For the six months ended June 30, 2014 and 2013, less than $0.1 million of interest income and $0.4 million of interest expense was recognized, respectively.
It is possible that approximately $0.1 million of unrecognized income tax benefits at June 30, 2014, primarily relating to uncertain tax positions attributable to compensation related accruals, will become recognized income tax benefits in the next twelve months due to the expiration of applicable statutes of limitations.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 9 Income Taxes - (Continued)
We file income tax returns with the Internal Revenue Service and various state, local and foreign tax agencies. The Company is currently under examination by various taxing authorities for the years 2008 through 2011. During the first quarter of 2014, the Internal Revenue Service finalized its audit of our federal income tax returns for the years 2010 through 2011. We agreed to and paid an assessment, for an immaterial amount, proposed by the Internal Revenue Service pursuant to such audit.
NOTE 10 Common Stock
As of June 30, 2014 and December 31, 2013, 67,052,134 and 66,896,518 shares of our common stock were outstanding, respectively.
During the three months ended June 30, 2014 and 2013, 112,108 and 75,398 shares of common stock, respectively, were issued primarily upon: (a) the exercise of stock options, (b) the satisfaction of required conditions under certain of our share-based compensation plans and (c) the purchase of common stock pursuant to our employee stock purchase plan. During the six months ended June 30, 2014 and 2013, 562,724 and 215,197 shares of common stock, respectively, were issued primarily upon: (a) the exercise of stock options, (b) the satisfaction of required conditions under certain of our share-based compensation plans and (c) the purchase of common stock pursuant to our employee stock purchase plan.
On September 26, 2011, our Board of Directors authorized the Company to repurchase up to $100.0 million of its outstanding common stock. During 2014, we repurchased approximately 0.4 million shares of our common stock for approximately $18.7 million. Since the inception of the repurchase program through June 30, 2014, we have repurchased 3.2 million shares of our common stock for approximately $96.2 million, and there remains authorization for us to repurchase approximately $3.8 million of our shares under that authorization. On December 5, 2013, our Board of Directors authorized us to repurchase up to an additional $100.0 million of our outstanding common stock. As a result, $103.8 million was available for repurchase as of June 30, 2014. The repurchase programs do not obligate the Company to acquire any particular amount of common stock and may be suspended, recommenced or discontinued at any time or from time to time without prior notice. Acquisitions under our repurchase programs may be made from time to time to the extent permitted by securities laws and other legal requirements, including provisions in our credit agreement placing limitations on such repurchases. The repurchase programs have been and will be funded from our operations.
NOTE 11 Retirement Plans
Our United Kingdom subsidiary has a defined benefit pension plan covering all eligible employees (the “UK Plan”); however, no individual joining the company after October 31, 2001 may participate in the plan. On May 31, 2010, we curtailed the future accrual of benefits for active employees under this plan.
Components of Net Periodic Pension Cost
The components of net periodic pension cost of the UK Plan for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended June 30, | | For the six months ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Interest cost | $ | 3,565 |
| | $ | 3,033 |
| | $ | 7,063 |
| | $ | 6,103 |
|
Expected return on plan assets | (4,292 | ) | | (3,536 | ) | | (8,503 | ) | | (7,115 | ) |
Amortization of unrecognized loss | 516 |
| | 631 |
| | 1,022 |
| | 1,269 |
|
Net periodic pension (income) expense | $ | (211 | ) | | $ | 128 |
| | $ | (418 | ) | | $ | 257 |
|
Employer Contributions
For the six months ended June 30, 2014, our United Kingdom subsidiary contributed approximately $2.8 million to its UK Plan. It anticipates contributing an additional $3.4 million during the remainder of 2014.
NOTE 12 Commitments and Contingencies
Government Contracts
As a government contractor, we are subject to U.S. government audits and investigations relating to our operations, including claims for fines, penalties and compensatory and treble damages, and possible suspension or debarment from doing business with
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 12 Commitments and Contingencies - (Continued)
the government. Based on currently available information, we believe the outcome of ongoing government disputes and investigations will not have a material impact on our financial position, results of operations or liquidity.
Legal Matters
One of our subsidiaries was a subcontractor to a mechanical contractor ("Mechanical Contractor") on a construction project where an explosion occurred. An investigation of the matter could not determine who was responsible for the explosion. As a result of the explosion, lawsuits have been commenced against various parties, but, to date, no lawsuits have been commenced against our subsidiary with respect to personal injury or damage to property as a consequence of the explosion. However, the Mechanical Contractor has asserted claims, in the context of an arbitration proceeding against our subsidiary, alleging that our subsidiary is responsible for a portion of the damages for which the Mechanical Contractor may be liable as a result of: (a) losses asserted by the owner of the project and/or the owner's general contractor because of delays in completion of the project and damages to its property, (b) personal injury suffered by individuals as a result of the explosion and (c) the Mechanical Contractor's legal fees in defending against any and all such claims. We believe, and have been advised by counsel, that we have a number of meritorious defenses to all such matters. We believe that the ultimate outcome of such matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. Notwithstanding our assessment of the final impact of this matter, we are not able to estimate with any certainty the amount of loss, if any, which would be associated with an adverse resolution.
One of our subsidiaries, USM, Inc. ("USM"), doing business in California provides, among other things, janitorial services to its customers by having those services performed by independent janitorial companies. USM and one of its customers, which owns retail stores (the “Customer”), are co-defendants in a federal class action lawsuit brought by employees of two of USM’s California local janitorial contractors. The action was commenced on September 5, 2013 in a Superior Court of California and was removed by USM on November 22, 2013 to the United States District Court for the Northern District of California. The employees allege in their complaint, among other things, that USM and the Customer violated a California statute that prohibits USM from entering into a contract with a janitorial contractor when it knows or should know that the contract does not include funds sufficient to allow the janitorial contractor to comply with all local, state and federal laws or regulations governing the labor or services to be provided. The employees have asserted that the amounts USM pays to its janitorial contractors are insufficient to allow those janitorial contractors to meet their obligations regarding, among other things, wages due for all hours their employees worked, minimum wages, overtime pay and meal and rest breaks. These employees seek to represent not only themselves, but also all other individuals who provided janitorial services at the Customer’s stores in California during the relevant four year time period. We do not believe USM or the Customer has violated the California statute or that the employees may bring the action as a class action on behalf of other employees of janitorial companies with whom USM contracted for the provision of janitorial services to the Customer. However, if the pending lawsuit is certified as a class action and USM is found to have violated the California statute, USM might have to pay significant damages and might be subject to similar lawsuits regarding the provision of janitorial services to its other customers in California. The plaintiffs seek a declaratory judgment that USM has violated the California statute, monetary damages, including all unpaid wages and interest thereon, restitution for unpaid wages, and an award of attorney fees and costs.
We are involved in several other proceedings in which damages and claims have been asserted against us. Other potential claims may exist that have not yet been asserted against us. We believe that we have a number of valid defenses to such proceedings and claims and intend to vigorously defend ourselves. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations or liquidity. Litigation is subject to many uncertainties and the outcome of litigation is not predictable with assurance. It is possible that some litigation matters for which reserves have not been established could be decided unfavorably to us, and that any such unfavorable decisions could have a material adverse effect on our financial position, results of operations or liquidity.
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. The majority of these restructuring expenses were as a result of our decision last year to withdraw
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 12 Commitments and Contingencies - (Continued)
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. As of June 30, 2014, the balance of these restructuring obligations yet to be paid was $3.6 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.
The changes in restructuring activity by reportable segments during the six months ended June 30, 2014 and June 30, 2013 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| United States electrical construction and facilities services segment | | United States mechanical construction and facilities services segment | | United States building services segment | | United Kingdom construction and building services segment | | Corporate administration | | Total |
Balance at December 31, 2012 | $ | 53 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 53 |
|
Charges | — |
| | — |
| | 50 |
| | 7,126 |
| | — |
| | 7,176 |
|
Payments | (12 | ) | | — |
| | (38 | ) | | (3,354 | ) | | — |
| | (3,404 | ) |
Balance at June 30, 2013 | $ | 41 |
| | $ | — |
| | $ | 12 |
| | $ | 3,772 |
| | $ | — |
| | $ | 3,825 |
|
Balance at December 31, 2013 | $ | 30 |
| | $ | 164 |
| | $ | — |
| | $ | 4,685 |
| | $ | — |
| | $ | 4,879 |
|
Charges | 182 |
| | (81 | ) | | — |
| | 946 |
| | 300 |
| | 1,347 |
|
Payments | (57 | ) | | (83 | ) | | — |
| | (2,165 | ) | | (300 | ) | | (2,605 | ) |
Balance at June 30, 2014 | $ | 155 |
| | $ | — |
| | $ | — |
| | $ | 3,466 |
| | $ | — |
| | $ | 3,621 |
|
A summary of restructuring expenses by reportable segments recognized for the six months ended June 30, 2014 was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| United States electrical construction and facilities services segment | | United States mechanical construction and facilities services segment | | United States building services segment | | United Kingdom construction and building services segment | | Corporate administration | | Total |
Severance | $ | 182 |
| | $ | — |
| | $ | — |
| | $ | 946 |
| | $ | — |
| | $ | 1,128 |
|
Leased facilities | — |
| | (81 | ) | | — |
| | — |
| | 300 |
| | 219 |
|
Total charges | $ | 182 |
| | $ | (81 | ) | | $ | — |
| | $ | 946 |
| | $ | 300 |
| | $ | 1,347 |
|
NOTE 13 Segment Information
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
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 13 Segment Information - (Continued)
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, mainly 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.
The following tables have been restated in all periods presented to reflect our new reportable segments (see Note 1, "Basis of Presentation" for further information) and represent information about industry segments and geographic areas for the three and six months ended June 30, 2014 and 2013 (in thousands):
|
| | | | | | | |
| For the three months ended June 30, |
| 2014 | | 2013 |
Revenues from unrelated entities: | | | |
United States electrical construction and facilities services | $ | 335,492 |
| | $ | 336,330 |
|
United States mechanical construction and facilities services | 538,556 |
| | 583,963 |
|
United States building services | 418,142 |
| | 448,459 |
|
United States industrial services | 177,232 |
| | 78,935 |
|
Total United States operations | 1,469,422 |
| | 1,447,687 |
|
United Kingdom construction and building services | 88,633 |
| | 109,066 |
|
Total worldwide operations | $ | 1,558,055 |
| | $ | 1,556,753 |
|
| | | |
Total revenues: | | | |
United States electrical construction and facilities services | $ | 340,155 |
| | $ | 343,335 |
|
United States mechanical construction and facilities services | 543,606 |
| | 598,847 |
|
United States building services | 427,988 |
| | 461,641 |
|
United States industrial services | 177,343 |
| | 80,009 |
|
Less intersegment revenues | (19,670 | ) | | (36,145 | ) |
Total United States operations | 1,469,422 |
| | 1,447,687 |
|
United Kingdom construction and building services | 88,633 |
| | 109,066 |
|
Total worldwide operations | $ | 1,558,055 |
| | $ | 1,556,753 |
|
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 13 Segment Information - (Continued)
|
| | | | | | | |
| For the six months ended June 30, |
| 2014 | | 2013 |
Revenues from unrelated entities: | | | |
United States electrical construction and facilities services | $ | 643,628 |
| | $ | 643,914 |
|
United States mechanical construction and facilities services | 1,051,567 |
| | 1,125,080 |
|
United States building services | 866,186 |
| | 903,615 |
|
United States industrial services | 409,190 |
| | 224,479 |
|
Total United States operations | 2,970,571 |
| | 2,897,088 |
|
United Kingdom construction and building services | 186,869 |
| | 228,066 |
|
Total worldwide operations | $ | 3,157,440 |
| | $ | 3,125,154 |
|
| | | |
Total revenues: | | | |
United States electrical construction and facilities services | $ | 654,952 |
| | $ | 653,110 |
|
United States mechanical construction and facilities services | 1,062,717 |
| | 1,150,631 |
|
United States building services | 885,952 |
| | 924,031 |
|
United States industrial services | 409,817 |
| | 226,070 |
|
Less intersegment revenues | (42,867 | ) | | (56,754 | ) |
Total United States operations | 2,970,571 |
| | 2,897,088 |
|
United Kingdom construction and building services | 186,869 |
| | 228,066 |
|
Total worldwide operations | $ | 3,157,440 |
| | $ | 3,125,154 |
|
|
| | | | | | | |
| For the three months ended June 30, |
| 2014 | | 2013 |
Operating income (loss): | | | |
United States electrical construction and facilities services | $ | 24,841 |
| | $ | 25,236 |
|
United States mechanical construction and facilities services | 28,740 |
| | 18,248 |
|
United States building services | 13,920 |
| | 16,763 |
|
United States industrial services | 12,376 |
| | 3,265 |
|
Total United States operations | 79,877 |
| | 63,512 |
|
United Kingdom construction and building services | 4,541 |
| | (4,537 | ) |
Corporate administration | (16,244 | ) | | (17,063 | ) |
Restructuring expenses | (438 | ) | | (5,813 | ) |
Total worldwide operations | 67,736 |
| | 36,099 |
|
Other corporate items: | | | |
Interest expense | (2,242 | ) | | (1,764 | ) |
Interest income | 221 |
| | 270 |
|
Income before income taxes | $ | 65,715 |
| | $ | 34,605 |
|
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 13 Segment Information - (Continued)
|
| | | | | | | |
| For the six months ended June 30, |
| 2014 | | 2013 |
Operating income (loss): | | | |
United States electrical construction and facilities services | $ | 46,496 |
| | $ | 44,176 |
|
United States mechanical construction and facilities services | 47,846 |
| | 29,388 |
|
United States building services | 34,218 |
| | 29,643 |
|
United States industrial services | 35,770 |
| | 26,012 |
|
Total United States operations | 164,330 |
| | 129,219 |
|
United Kingdom construction and building services | 5,838 |
| | (3,258 | ) |
Corporate administration | (31,711 | ) | | (31,421 | ) |
Restructuring expenses | (1,347 | ) | | (7,176 | ) |
Total worldwide operations | 137,110 |
| | 87,364 |
|
Other corporate items: | | | |
Interest expense | (4,490 | ) | | (3,626 | ) |
Interest income | 455 |
| | 627 |
|
Income before income taxes | $ | 133,075 |
| | $ | 84,365 |
|
|
| | | | | | | |
| June 30, 2014 | | December 31, 2013 |
Total assets: | | | |
United States electrical construction and facilities services | $ | 312,989 |
| | $ | 329,742 |
|
United States mechanical construction and facilities services | 804,622 |
| | 795,256 |
|
United States building services | 746,277 |
| | 756,785 |
|
United States industrial services | 934,783 |
| | 940,916 |
|
Total United States operations | 2,798,671 |
| | 2,822,699 |
|
United Kingdom construction and building services | 148,796 |
| | 160,828 |
|
Corporate administration | 457,428 |
| | 482,388 |
|
Total worldwide operations | $ | 3,404,895 |
| | $ | 3,465,915 |
|
Our United Kingdom construction and building services segment recognized income of $4.8 million for the three and six months ended June 30, 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. Our corporate administration operating loss for the six months ended June 30, 2013 was reduced by the receipt of an insurance recovery of approximately $2.6 million that was received in January 2013 associated with a previously disposed of operation, which is classified as a component of "Cost of sales" in the Condensed Consolidated Statements of Operations.
NOTE 14 Subsequent Event
On July 22, 2014, we sold a building owned by one of our subsidiaries reported in the United States mechanical construction and facilities services segment. We expect to record a gain of approximately $11.7 million for this transaction in the third quarter of 2014, which will be classified as a "Gain on sale of assets" in the Condensed Consolidated Statements of Operations.
|
| |
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.
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, |
| 2014 | | % of Total | | 2013 | | % of 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 | % |
|
| | | | | | | | | | | | | |
| For the six months ended June 30, |
| 2014 | | % of Total | | 2013 | | % of 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
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):
|
| | | | | | | | | | | | | | | | | | | | |
| June 30, 2014 | | % of Total | | December 31, 2013 | | % of Total | | June 30, 2013 | | % of 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 June 30, | | For the six months ended 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 | % |
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 June 30, | | For the six months ended 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.
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, |
| 2014 | | % of Segment Revenues | | 2013 | | % of Segment 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, |
| 2014 | | % of Segment Revenues | | 2013 | | % of Segment Revenues |
Operating income (loss): | | | | | | | |
United States electrical construction and facilities services | $ | 46,496 |
| | 7.2 | % | | $ | 44,176 |
| | 6.9 | % |
United States mechanical construction and facilities services | 47,846 |
| | 4.5 | % | | 29,388 |
| | 2.6 | % |
United States building services | 34,218 |
| | 4.0 | % | | 29,643 |
| | 3.3 | % |
United States industrial services | 35,770 |
| | 8.7 | % | | 26,012 |
| | 11.6 | % |
Total United States operations | 164,330 |
| | 5.5 | % | | 129,219 |
| | 4.5 | % |
United Kingdom construction and building services | 5,838 |
| | 3.1 | % | | (3,258 | ) | | (1.4 | )% |
Corporate administration | (31,711 | ) | | — |
| | (31,421 | ) | | — |
|
Restructuring expenses | (1,347 | ) | | — |
| | (7,176 | ) | | — |
|
Total worldwide operations | 137,110 |
| | 4.3 | % | | 87,364 |
| | 2.8 | % |
Other corporate items: | | | | | | | |
Interest expense | (4,490 | ) | | | | (3,626 | ) | | |
Interest income | 455 |
| | | | 627 |
| | |
Income before income taxes | $ | 133,075 |
| | | | $ | 84,365 |
| | |
As described below in more detail, operating income was $67.7 million and $137.1 million for the three and six months ended June 30, 2014, respectively, compared to $36.1 million and $87.4 million for the three and six months ended June 30, 2013. Operating margin was 4.3% for both periods ended June 30, 2014 compared to 2.3% and 2.8% for the three and six months ended June 30, 2013, respectively.
Operating income of our United States electrical construction and facilities services segment for the three and six months ended June 30, 2014 was $24.8 million and $46.5 million, respectively, compared to operating income of $25.2 million and $44.2 million for the three and six months ended June 30, 2013, respectively. The decrease in operating income for the three months ended June 30, 2014 was primarily due to a decrease in gross profit attributable to transportation, healthcare and water and wastewater construction projects. The increase in operating income for the six months ended June 30, 2014 was primarily the result of an increase in gross profit attributable to commercial, manufacturing and institutional construction projects. The decrease in operating margin for the three months ended June 30, 2014 was attributable to an increase in the ratio of selling, general and
administrative expenses to revenues. The increase in operating margin for the six months ended June 30, 2014 was primarily attributable to an increase in gross profit margin.
Our United States mechanical construction and facilities services segment operating income for the three months ended June 30, 2014 was $28.7 million, a $10.5 million increase compared to operating income of $18.2 million for the three months ended June 30, 2013. Operating income for the six months ended June 30, 2014 was $47.8 million, a $18.5 million increase compared to operating income of $29.4 million for the six months ended June 30, 2013. Operating income was favorably impacted by an increase in gross profit from institutional, commercial, manufacturing and hospitality construction projects, partially offset by a decrease in gross profit from transportation, water and wastewater and healthcare construction projects. The results for the three and six months ended June 30, 2014 included the receipt of $3.0 million from former shareholders of a company we had acquired as a result of the settlement of a claim by us under the acquisition agreement; this payment has been recorded as a reduction of "Cost of sales" in the Condensed Consolidated Statements of Operations. The results for the three and six months ended June 30, 2013 included losses of $10.9 million and $18.5 million, respectively, from one of our subsidiaries at two projects located in the southeastern United States, partially offset by $2.4 million and $2.9 million, respectively, of income attributable to the reversal of contingent consideration accruals related to prior acquisitions. Companies acquired in 2013 generated operating income of $0.9 million, net of amortization expense of $0.1 million attributable to identifiable intangible assets, for each of the three and six months ended June 30, 2014. The increase in operating margin for both 2014 periods was attributable to an increase in gross profit margin.
Operating income of our United States building services segment for the three months ended June 30, 2014 decreased by $2.8 million compared to operating income for the three months ended June 30, 2013, and its operating income for the six months ended June 30, 2014 increased by $4.6 million compared to operating income for the six months ended June 30, 2013. The decrease in operating income for the three months ended June 30, 2014 was primarily attributable to: (a) our commercial site-based services, as a result of a large contract that was terminated by agreement of the parties and (b) our energy services, due to a reduction of large project work. The increase in operating income for the six months ended June 30, 2014 was primarily attributable to an increase in gross profit from this segment's: (a) mobile mechanical services, partially due to increased profitability in services related work, (b) government site-based services and (c) snow removal contracts from certain of our commercial site-based services operations. The decrease in operating margin for the three months ended June 30, 2014 was attributable to an increase in the ratio of selling, general and administrative expenses to revenues. The increase in operating margin for the six months ended June 30, 2014 was attributable to an increase in gross profit margin.
Operating income of our United States industrial services segment for the three months ended June 30, 2014 increased by $9.1 million compared to operating income for the three months ended June 30, 2013, and its operating income for the six months ended June 30, 2014 increased by $9.8 million compared to the six months ended June 30, 2013. For the three and six months ended June 30, 2014, RSI contributed $1.5 million and $8.8 million of operating income, net of $3.4 million and $6.9 million of amortization expense attributable to identifiable intangible assets, respectively. Operating income for both periods also benefited from an increase in demand for this segment’s industrial field services. The increase in operating income for the six months ended June 30, 2014 was partially offset by a reduction in operating income from our industrial shop services operations, which had benefited from exceptionally strong demand during the first quarter of 2013. The increase in operating margin for the three months ended June 30, 2014 was attributable to a decrease in the ratio of selling, general and administrative expenses to revenues. The decrease in operating margin for the six months ended June 30, 2014 was attributable to a decrease in gross profit margin.
Our United Kingdom construction and building services segment operating income was $4.5 million and $5.8 million for the three and six months ended June 30, 2014, respectively, compared to operating losses of $4.5 million and $3.3 million for the three and six months ended June 30, 2013, respectively, due to a reduction in losses from its construction operations offset in part by a decrease in income recognized from the commercial market within its building services operations. In addition, this segment recognized income of $4.8 million for the three and six months ended June 30, 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. The increase in operating margin for both 2014 periods was attributable to an increase in gross profit margins and a decrease in the ratio of selling, general and administrative expenses to revenues.
Our corporate administration operating loss for the three months ended June 30, 2014 was $16.2 million compared to $17.1 million for the three months ended June 30, 2013. Our corporate administration loss for the six months ended June 30, 2014 was $31.7 million compared to $31.4 million for the six months ended June 30, 2013. Our corporate administration operating loss for the three and six months ended June 30, 2013 included $1.4 million of transaction costs associated with the acquisition of RSI. Also, our corporate administration operating loss for the six months ended June 30, 2013 was reduced by the receipt of an insurance recovery of approximately $2.6 million that was received in January 2013 associated with a previously disposed of operation, which is classified as a component of "Cost of sales" in the Condensed Consolidated Statements of Operations.
Interest expense for the three months ended June 30, 2014 and 2013 was $2.2 million and $1.8 million, respectively. Interest expense for the six months ended June 30, 2014 and 2013 was $4.5 million and $3.6 million, respectively. The increase in interest expense for both 2014 periods was primarily due to increased borrowings. Interest income for the three months ended June 30, 2014 and 2013 was $0.2 million and $0.3 million, respectively. Interest income for the six months ended June 30, 2014 and 2013 was $0.5 million and $0.6 million, respectively.
For the three months ended June 30, 2014 and 2013, our income tax provision was $24.7 million and $13.1 million, respectively, based on effective income tax rates, before discrete items and less amounts attributable to noncontrolling interests, of 38.0% and 40.7%, respectively. The actual income tax rates on income before income taxes, less amounts attributable to noncontrolling interests, for the three months ended June 30, 2014 and 2013, inclusive of discrete items, were 38.0% and 38.5%, respectively. For the six months ended June 30, 2014 and 2013, our income tax provision was $50.2 million and $32.2 million, respectively, based on effective income tax rates, before discrete items and less amounts attributable to noncontrolling interests, of 38.0% and 39.4%, respectively. The actual income tax rates on income before income taxes, less amounts attributable to noncontrolling interests, for the six months ended June 30, 2014 and 2013, inclusive of discrete items, were 38.1% and 38.6%, respectively. The increase in the 2014 income tax provision was primarily due to increased income before income taxes.
Liquidity and Capital Resources
The following table presents our net cash used in operating activities, investing activities and financing activities (in thousands):
|
| | | | | | | |
| For the six months ended June 30, |
| 2014 | | 2013 |
Net cash provided by (used in) operating activities | $ | 39,640 |
| | $ | (52,211 | ) |
Net cash used in investing activities | $ | (14,431 | ) | | $ | (10,393 | ) |
Net cash used in financing activities | $ | (29,639 | ) | | $ | (8,058 | ) |
Effect of exchange rate changes on cash and cash equivalents | $ | 1,736 |
| | $ | (4,256 | ) |
Our consolidated cash balance decreased by approximately $2.7 million from $439.8 million at December 31, 2013 to $437.1 million at June 30, 2014. Net cash provided by operating activities for the six months ended June 30, 2014 was $39.6 million compared to $52.2 million of net cash used in operating activities for the six months ended June 30, 2013. The increase in cash provided by operating activities, excluding the effect of businesses acquired, was primarily due to: (a) a $139.1 million decrease in our accounts receivable balances and (b) a $21.8 million reduction in income taxes paid, partially offset by a $85.8 million decrease in accounts payable. Net cash used in investing activities was $14.4 million for the six months ended June 30, 2014 compared to net cash used in investing activities of $10.4 million for the six months ended June 30, 2013. Net cash used in financing activities for the six months ended June 30, 2014 increased by approximately $21.6 million compared to the six months ended June 30, 2013. The increase in net cash used in financing activities was primarily due to an increase in funds used for the repurchase of common stock, repayment of long-term debt, and payment of regular quarterly dividends to stockholders, partially offset by an increase in proceeds from the exercise of stock options.
The following is a summary of material contractual obligations and other commercial commitments (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years |
Term Loan (including interest currently at 1.40%) (1) | | $ | 360.3 |
| | $ | 22.2 |
| | $ | 43.8 |
| | $ | 294.3 |
| | $ | — |
|
Capital lease obligations | | 4.2 |
| | 1.8 |
| | 2.1 |
| | 0.3 |
| | — |
|
Operating leases | | 181.1 |
| | 53.2 |
| | 75.7 |
| | 30.4 |
| | 21.8 |
|
Open purchase obligations (2) | | 881.9 |
| | 742.2 |
| | 128.8 |
| | 10.9 |
| | — |
|
Other long-term obligations, including current portion (3) | | 358.9 |
| | 40.1 |
| | 306.0 |
| | 12.8 |
| | — |
|
Liabilities related to uncertain income tax positions | | 2.6 |
| | 0.1 |
| | 1.5 |
| | — |
| | 1.0 |
|
Total Contractual Obligations | | $ | 1,789.0 |
| | $ | 859.6 |
| | $ | 557.9 |
| | $ | 348.7 |
| | $ | 22.8 |
|
| | | | | | | | | | |
| | | | Amount of Commitment Expiration by Period |
Other Commercial Commitments | | Total Committed | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years |
Letters of credit | | $ | 92.6 |
| | $ | 90.4 |
| | $ | 2.2 |
| | $ | — |
| | $ | — |
|
_________
| |
(1) | On November 25, 2013, we entered into a a $750.0 million revolving credit facility (the “2013 Revolving Credit Facility”) and a $350.0 million term loan (the "Term Loan"), (collectively referred to as the "2013 Credit Agreement"). The proceeds of the Term Loan were used to repay amounts drawn under our previous credit agreement. As of June 30, 2014, the amount outstanding under the Term Loan was $341.3 million. |
| |
(2) | Represents open purchase orders for material and subcontracting costs related to construction and services 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. |
Until November 25, 2013, we had a revolving credit agreement (the "2011 Credit Agreement") as amended, which provided for a revolving credit facility of $750.0 million. The 2011 Credit Agreement was effective November 21, 2011. Effective November 25, 2013, we amended and restated the 2011 Credit Agreement to provide for a $750.0 million revolving credit facility (the “2013 Revolving Credit Facility”) and a $350.0 million term loan (the "Term Loan") (collectively referred to as the "2013 Credit Agreement") expiring November 25, 2018. The proceeds of the Term Loan were used to repay amounts drawn under the 2011 Credit Agreement. We may increase the 2013 Revolving Credit Facility to $1.05 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $250.0 million of available borrowings under the 2013 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries. The 2013 Credit Agreement is guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets and most of the assets of most of our subsidiaries. The 2013 Revolving Credit Facility and the Term Loan contain various covenants providing for, among other things, maintenance of certain financial ratios and certain limitations on payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. A commitment fee is payable on the average daily unused amount of the 2013 Revolving Credit Facility, which ranges from 0.20% to 0.30%, based on certain financial tests. The fee is 0.20% of the unused amount as of June 30, 2014. Borrowings under the 2013 Credit Agreement bear interest at (1) a rate which is the prime commercial lending rate announced by Bank of Montreal from time to time (3.25% at June 30, 2014) plus 0.25% to 0.75%, based on certain financial tests or (2) United States dollar LIBOR (0.15% at June 30, 2014) plus 1.25% to 1.75%, based on certain financial tests. The interest rate in effect at June 30, 2014 was 1.40%. Letter of credit fees issued under the 2013 Revolving Credit Facility range from 1.25% to 1.75% of the respective face amounts of outstanding letters of credit and are computed based on certain financial tests. We capitalized approximately $3.0 million of debt issuance costs associated with the 2013 Credit Agreement. This amount is being amortized over the life of the agreement and is included as part of interest expense. We are required to make principal payments on the Term Loan in installments on the last day of March, June, September and December of each year, which commenced with the calendar quarter ended March 31, 2014, in the amount of $4.4 million, with a payment of all unpaid principal and interest due on November 25, 2018. As of June 30, 2014, the balance of the Term Loan was $341.3 million. As of June 30, 2014 and December 31, 2013, we had approximately $92.4 million and $83.3 million of letters of credit outstanding, respectively. There were no borrowings outstanding under the 2013 Revolving Credit Facility at June 30, 2014.
The terms of our construction contracts frequently require that we obtain from surety companies (“Surety Companies”) and provide to our customers payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure our payment and performance obligations under such contracts, and we have agreed to indemnify the Surety Companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. In addition, at the request of labor unions representing certain of our employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, our bonding requirements typically increase as the amount of public sector work increases. As of June 30, 2014, based on our percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $1.1 billion. The Surety Bonds are issued by Surety Companies in return for premiums, which vary depending on the size and type of bond.
We continually monitor our available limits of Surety Bonds, which we believe to be adequate, and discuss with our current and other Surety Bond providers the amount of Surety Bonds that may be available to us based on our financial strength and the absence of any default by us on any Surety Bond issued on our behalf. However, if we experience changes in our bonding relationships or if there are adverse changes in the surety industry, we may seek to satisfy certain customer requests for Surety Bonds by posting other forms of collateral in lieu of Surety Bonds such as letters of credit or parent company guarantees, seeking to convince customers to forego the requirement for Surety Bonds, by increasing our activities in business segments that rarely require Surety Bonds such as the building and industrial services segments, and/or by refraining from bidding for certain projects
that require Surety Bonds. There can be no assurance that we would be able to effectuate alternatives to providing Surety Bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require Surety Bonds to replace projects requiring Surety Bonds that we may decide not to pursue. Accordingly, if we were to experience a reduction in the availability of Surety Bonds, we could experience a material adverse effect on our financial position, results of operations and/or cash flows.
From time to time in the ordinary course of business, we guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any additional liabilities as a consequence of these guarantees.
We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein.
We are a party to lawsuits and other proceedings in which other parties seek to recover from us amounts ranging from a few thousand dollars to over $10.0 million. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations or liquidity.
On September 26, 2011, our Board of Directors authorized the Company to repurchase up to $100.0 million of its outstanding common stock. During 2014, we repurchased approximately 0.4 million shares of our common stock for approximately $18.7 million. Since the inception of the repurchase program through June 30, 2014, we have repurchased 3.2 million shares of our common stock for approximately $96.2 million, and there remains authorization for us to repurchase approximately $3.8 million of our shares under that authorization. On December 5, 2013, our Board of Directors authorized us to repurchase up to an additional $100.0 million of our outstanding common stock. As a result, $103.8 million was available for repurchase as of June 30, 2014. The repurchase programs do not obligate the Company to acquire any particular amount of common stock and may be suspended, recommenced or discontinued at any time or from time to time without prior notice. Acquisitions under our repurchase programs may be made from time to time to the extent permitted by securities laws and other legal requirements, including provisions in our credit agreement placing limitations on such repurchases. The repurchase programs have been and will be funded from our operations.
We have paid quarterly dividends since October 25, 2011. In December 2013, our Board of Directors announced its intention to increase the regular quarterly dividend to $0.08 per share commencing with the dividend to be paid in the first quarter of 2014. We expect that such quarterly dividends will be paid in the foreseeable future. Prior to October 25, 2011, no cash dividends had been paid on the Company's common stock. Our 2013 Credit Agreement places limitations on the payment of dividends on our common stock. However, we do not believe that the terms of the credit agreement currently materially limit our ability to pay a quarterly dividend of $0.08 per share for the foreseeable future. The payment of dividends has been and will be funded from our operations.
Our primary source of liquidity has been, and is expected to continue to be, cash generated by operating activities. We also maintain our 2013 Revolving Credit Facility that may be utilized, among other things, to meet short-term liquidity needs in the event cash generated by operating activities is insufficient or to enable us to seize opportunities to participate in joint ventures or to make acquisitions that may require access to cash on short notice or for any other reason. However, negative macroeconomic trends may have an adverse effect on liquidity. Short-term liquidity is also impacted by the type and length of construction contracts in place. During economic downturns, there were typically fewer small discretionary projects from the private sector, and our competitors aggressively bid larger long-term infrastructure and public sector contracts. Performance of long duration contracts typically requires greater amounts of working capital. While we strive to maintain a net over-billed position with our customers, there can be no assurance that a net over-billed position can be maintained. Our net over-billings, defined as the balance sheet accounts “Billings in excess of costs and estimated earnings on uncompleted contracts” less “Cost and estimated earnings in excess of billings on uncompleted contracts”, were $270.5 million and $290.6 million as of June 30, 2014 and December 31, 2013, respectively.
Long-term liquidity requirements can be expected to be met initially through cash generated from operating activities and our 2013 Revolving Credit Facility. Based upon our current credit ratings and financial position, we can reasonably expect to be able to incur long-term debt to fund acquisitions. Over the long term, our primary revenue risk factor continues to be the level of demand for non-residential construction services, which is influenced by macroeconomic trends including interest rates and governmental economic policy. In addition, our ability to perform work is critical to meeting long-term liquidity requirements.
We believe that our current cash balances and our borrowing capacity available under our 2013 Revolving Credit Facility or other forms of financing available to us through borrowings, combined with cash expected to be generated from operations, will be sufficient to provide our short-term and foreseeable long-term liquidity and meet our expected capital expenditure requirements.
Certain Insurance Matters
As of June 30, 2014 and December 31, 2013, we utilized approximately $92.4 million and $83.3 million, respectively, of letters of credit obtained under our 2013 Revolving Credit Facility as collateral for our insurance obligations.
New Accounting Pronouncements
We review new accounting standards to determine the expected financial impact, if any, that the adoption of such standards will have. Refer to Part I. Item 1, "Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 2, New Accounting Pronouncements", for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations or liquidity.
Application of Critical Accounting Policies
Our condensed consolidated financial statements are based on the application of significant accounting policies, which require management to make significant estimates and assumptions. Our significant accounting policies are described in Note 2 – Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8 of the annual report on Form 10-K for the year ended December 31, 2013. We believe that some of the more critical judgment areas in the application of accounting policies that affect our financial condition and results of operations are the impact of changes in the estimates and judgments pertaining to: (a) revenue recognition from (i) long-term construction contracts for which the percentage-of-completion method of accounting is used and (ii) services contracts; (b) collectibility or valuation of accounts receivable; (c) insurance liabilities; (d) income taxes; and (e) goodwill and identifiable intangible assets.
Revenue Recognition for Long-term Construction Contracts and Services Contracts
We believe our most critical accounting policy is revenue recognition from long-term construction contracts for which we use the percentage-of-completion method of accounting. Percentage-of-completion accounting is the prescribed method of accounting for long-term contracts in accordance with Accounting Standard Codification (“ASC”) Topic 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts”, and, accordingly, is the method used for revenue recognition within our industry. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Certain of our electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Pre-contract costs from our construction projects are generally expensed as incurred. Application of percentage-of-completion accounting results in the recognition of costs and estimated earnings in excess of billings on uncompleted contracts in the Condensed Consolidated Balance Sheets. Costs and estimated earnings in excess of billings on uncompleted contracts reflected in the Condensed Consolidated Balance Sheets arise when revenues have been recognized but the amounts cannot be billed under the terms of contracts. Such amounts are recoverable from customers upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract.
Costs and estimated earnings in excess of billings on uncompleted contracts also include amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders in dispute or unapproved as to both scope and price or other customer-related causes of unanticipated additional contract costs (claims and unapproved change orders). Such amounts are recorded at estimated net realizable value and take into account factors that may affect our ability to bill unbilled revenues and collect amounts after billing. The profit associated with claim amounts is not recognized until the claim has been settled and payment has been received. We did not recognize any material amounts associated with claim settlements during the periods presented. Due to uncertainties inherent in estimates employed in applying percentage-of-completion accounting, estimates may be revised as project work progresses. Application of percentage-of-completion accounting requires that the impact of revised estimates be reported prospectively in the condensed consolidated financial statements. In addition to revenue recognition for long-term construction contracts, we recognize revenues from the performance of services for maintenance, repair and retrofit work consistent with the performance of services, which are generally on a pro-rata basis over the life of the contractual arrangement. Expenses related to all services arrangements are recognized as incurred. Revenues related to the engineering, manufacturing and repairing of shell and tube heat exchangers are recognized when the product is shipped and all other revenue recognition criteria have been met. Provisions for the entirety of estimated losses on uncompleted contracts are made in the period in which such losses are determined. During the three and six months ended June 30, 2013, we recognized losses of approximately $10.9 million and $18.5 million, respectively, associated with a project within the United States mechanical construction and facilities services segment as a result of a change in contract estimates. There were no significant losses recognized during the three and six months ended June 30, 2014.
Accounts Receivable
We are required to estimate the collectibility of accounts receivable. A considerable amount of judgment is required in assessing the likelihood of realization of receivables. Relevant assessment factors include the creditworthiness of the customer, our prior collection history with the customer and related aging of the past due balances. At June 30, 2014 and December 31, 2013, our accounts receivable of $1,203.7 million and $1,268.2 million, respectively, included allowances for doubtful accounts of $10.2 million and $11.9 million, respectively. The decrease in our allowance for doubtful accounts was primarily due to the write-off of accounts receivable against the allowance for doubtful accounts. Specific accounts receivable are evaluated when we believe a customer may not be able to meet its financial obligations due to deterioration of its financial condition or its credit ratings. The allowance for doubtful accounts requirements are based on the best facts available and are re-evaluated and adjusted on a regular basis as additional information is received.
Insurance Liabilities
We have loss payment deductibles for certain workers’ compensation, automobile liability, general liability and property claims, have self-insured retentions for certain other casualty claims and are self-insured for employee-related healthcare claims. Losses are recorded based upon estimates of our liability for claims incurred and for claims incurred but not reported. The liabilities are derived from known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate for the majority of these obligations. We believe the liabilities recognized on our balance sheets for these obligations are adequate. However, such obligations are difficult to assess and estimate due to numerous factors, including severity of injury, determination of liability in proportion to other parties, timely reporting of occurrences and effectiveness of safety and risk management programs. Therefore, if our actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and will be recorded in the period that the experience becomes known. Our estimated insurance liabilities for workers' compensation, automobile liability, general liability and property claims decreased by $2.8 million for the six months ended June 30, 2014 compared to the year ended December 31, 2013, primarily due to a reduction in estimated losses as a result of favorable claims experience. If our estimated insurance liabilities for workers' compensation, automobile liability, general liability and property claims had increased by 10%, it would have resulted in $13.8 million of additional expense for the six months ended June 30, 2014.
Income Taxes
We had net deferred income tax liabilities at June 30, 2014 and December 31, 2013 of $130.8 million and $126.8 million, respectively, primarily resulting from differences between the carrying value and income tax basis of certain identifiable intangible assets and depreciable fixed assets, which will impact our taxable income in future periods. Included within these net deferred income tax liability balances are deferred income tax assets. A valuation allowance is required when it is more likely than not that all or a portion of a deferred income tax asset will not be realized. As of June 30, 2014 and December 31, 2013, the total valuation allowance on deferred income tax assets was approximately $2.2 million.
Goodwill and Identifiable Intangible Assets
As of June 30, 2014, we had $834.1 million and $522.5 million, respectively, of goodwill and net identifiable intangible assets (primarily consisting of our contract backlog, developed technology/vendor network, customer relationships, non-competition agreements and trade names), primarily arising out of the acquisition of companies. As of December 31, 2013, goodwill and net identifiable intangible assets were $834.8 million and $541.5 million, respectively. The changes to goodwill since December 31, 2013 were primarily related to the sale of a subsidiary in January 2014 and changes in the purchase price accounting for an acquisition during 2013. The determination of related estimated useful lives for identifiable intangible assets and whether those assets are impaired involves significant judgments based upon short and long-term projections of future performance. These forecasts reflect assumptions regarding the ability to successfully integrate acquired companies, as well as macroeconomic conditions. ASC Topic 350, “Intangibles—Goodwill and Other” (“ASC 350”) requires goodwill and other identifiable intangible assets with indefinite useful lives not be amortized, but instead must be tested at least annually for impairment (which we test each October 1, absent any impairment indicators), and be written down if impaired. ASC 350 requires that goodwill be allocated to its respective reporting unit and that identifiable intangible assets with finite lives be amortized over their useful lives.
We test for impairment of our goodwill at the reporting unit level. Our reporting units are consistent with the reportable segments identified in Note 12, "Segment Information", of the notes to condensed consolidated financial statements. In assessing whether our goodwill is impaired, we first qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount using various factors. If after this assessment we are unable to determine that the fair value of a reporting unit exceeds the carrying amount, we proceed to the two-step process as prescribed by ASC 350. The first step of this test compares the fair value of the reporting unit, determined based upon discounted estimated future cash flows, to the carrying amount, including goodwill. If the fair value exceeds the carrying amount, no further work is required and no impairment loss is
recognized. If the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is potentially impaired and step two of the goodwill impairment test would need to be performed to measure the amount of an impairment loss, if any. In the second step, the impairment is computed by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss in the amount of the excess is recognized and charged to operations. No impairment of our goodwill was recognized for either of the three or six month periods ended June 30, 2014 and 2013.
We also test for the impairment of trade names that are not subject to amortization by calculating the fair value using the “relief from royalty payments” methodology. This approach involves two steps: (a) estimating reasonable royalty rates for each trade name and (b) applying these royalty rates to a net revenue stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each trade name. If the carrying amount of the trade name is greater than the implied fair value of the trade name, an impairment in the amount of the excess is recognized and charged to operations. No impairment of our trade names was recognized for either of the three or six month periods ended June 30, 2014 and 2013.
In addition, we review for the impairment of other identifiable intangible assets that are being amortized whenever facts and circumstances indicate that their carrying values may not be fully recoverable. This test compares their carrying values to the undiscounted pre-tax cash flows expected to result from the use of the assets. If the assets are impaired, the assets are written down to their fair values, generally determined based on their future discounted cash flows. No impairment of our other identifiable intangible assets was recognized for either of the three or six month periods ended June 30, 2014 and 2013.
As of June 30, 2014, we had $834.1 million of goodwill on our balance sheet and, of this amount, approximately 46.1% relates to our United States industrial services segment, 27.4% relates to our United States building services segment, approximately 26.0% relates to our United States mechanical construction and facilities services segment and approximately 0.5% relates to our United States electrical construction and facilities services segment. As of the date of our latest impairment test, October 1, 2013, the carrying values of our United States industrial services segment, our United States building services segment, our United States mechanical construction and facilities services segment and our United States electrical construction and facilities services segment were approximately $744.9 million, $487.7 million, $237.7 million and $58.7 million, respectively. The fair values of our United States industrial services segment, our United States building services segment, our United States mechanical construction and facilities services segment and our United States electrical construction and facilities services segment exceeded their carrying values by approximately $45.0 million, $126.0 million, $519.9 million, and $366.8 million, respectively. The weighted average cost of capital used in testing goodwill for impairment was 12.1%, 12.6% and 11.1% for our domestic construction segments, our United states building services segment and our United States industrial services segment, respectively. The perpetual growth rate used was 2.7% for our domestic segments.
We have certain businesses, particularly within our United States industrial services segment, whose results are highly impacted by the demand for some of our offerings within the industrial and oil and gas markets. Future performance of this segment, along with a continued evaluation of the conditions of its end user markets, will be important to ongoing impairment assessments. Should its actual results suffer a decline or expected future results be revised downward, the risk of goodwill impairment or impairment of other identifiable intangible assets would increase.
Our development of the present value of future cash flow projections used in impairment testing is based upon assumptions and estimates by management from reviews of our operating results, business plans, anticipated growth rates and margins, and weighted average cost of capital, among others. Those assumptions and estimates can change in future periods, and other factors used in assessing fair value are outside the control of management, such as interest rates. There can be no assurance that estimates and assumptions made for purposes of our goodwill and identifiable asset impairment testing will prove to be accurate predictions of the future. If our assumptions regarding future business performance or anticipated growth rates and/or margins are not achieved, or there is a rise in interest rates, we may be required to record goodwill and/or identifiable asset impairment charges in future periods.
Although we have not yet conducted our October 1, 2014 goodwill and other impairment tests, there have been no impairments recognized through the first half of 2014. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such a charge would be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have not used any derivative financial instruments during the three months ended June 30, 2014, including trading or speculating on changes in commodity prices of materials used in our business.
We are exposed to market risk for changes in interest rates for borrowings und