Document
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 September 30, 2016
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) |
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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 October 24, 2016: 60,646,476 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) |
| | | | | | | |
| September 30, 2016 (Unaudited) | | December 31, 2015 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 504,558 |
| | $ | 486,831 |
|
Accounts receivable, net | 1,495,566 |
| | 1,359,862 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts | 142,553 |
| | 117,734 |
|
Inventories | 43,913 |
| | 37,545 |
|
Prepaid expenses and other | 60,526 |
| | 64,140 |
|
Total current assets | 2,247,116 |
| | 2,066,112 |
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Investments, notes and other long-term receivables | 8,227 |
| | 8,359 |
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Property, plant and equipment, net | 128,290 |
| | 122,018 |
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Goodwill | 979,339 |
| | 843,170 |
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Identifiable intangible assets, net | 500,056 |
| | 472,834 |
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Other assets | 31,925 |
| | 30,164 |
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Total assets | $ | 3,894,953 |
| | $ | 3,542,657 |
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LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Current maturities of long-term debt and capital lease obligations | $ | 19,889 |
| | $ | 17,541 |
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Accounts payable | 465,362 |
| | 488,251 |
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Billings in excess of costs and estimated earnings on uncompleted contracts | 467,077 |
| | 429,235 |
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Accrued payroll and benefits | 304,032 |
| | 268,033 |
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Other accrued expenses and liabilities | 190,476 |
| | 209,361 |
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Total current liabilities | 1,446,836 |
| | 1,412,421 |
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Borrowings under revolving credit facility | 125,000 |
| | — |
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Long-term debt and capital lease obligations | 378,388 |
| | 297,559 |
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Other long-term obligations | 360,837 |
| | 352,621 |
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Total liabilities | 2,311,061 |
| | 2,062,601 |
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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, 61,445,905 and 61,727,709 shares issued, respectively | 614 |
| | 617 |
|
Capital surplus | 108,405 |
| | 130,369 |
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Accumulated other comprehensive loss | (76,616 | ) | | (76,953 | ) |
Retained earnings | 1,560,489 |
| | 1,432,980 |
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Treasury stock, at cost 659,841 shares | (10,302 | ) | | (10,302 | ) |
Total EMCOR Group, Inc. stockholders’ equity | 1,582,590 |
| | 1,476,711 |
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Noncontrolling interests | 1,302 |
| | 3,345 |
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Total equity | 1,583,892 |
| | 1,480,056 |
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Total liabilities and equity | $ | 3,894,953 |
| | $ | 3,542,657 |
|
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 September 30, | | Nine months ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues | $ | 1,923,174 |
| | $ | 1,699,128 |
| | $ | 5,601,560 |
| | $ | 4,940,900 |
|
Cost of sales | 1,655,130 |
| | 1,463,726 |
| | 4,835,667 |
| | 4,249,042 |
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Gross profit | 268,044 |
| | 235,402 |
| | 765,893 |
| | 691,858 |
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Selling, general and administrative expenses | 181,441 |
| | 165,135 |
| | 530,654 |
| | 488,117 |
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Restructuring expenses | 539 |
| | 301 |
| | 1,271 |
| | 742 |
|
Operating income | 86,064 |
| | 69,966 |
| | 233,968 |
| | 202,999 |
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Interest expense | (3,479 | ) | | (2,226 | ) | | (8,973 | ) | | (6,650 | ) |
Interest income | 161 |
| | 157 |
| | 518 |
| | 515 |
|
Income from continuing operations before income taxes | 82,746 |
| | 67,897 |
| | 225,513 |
| | 196,864 |
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Income tax provision | 30,783 |
| | 25,720 |
| | 82,663 |
| | 74,672 |
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Income from continuing operations | 51,963 |
| | 42,177 |
| | 142,850 |
| | 122,192 |
|
Loss from discontinued operation, net of income taxes | (406 | ) | | (270 | ) | | (1,584 | ) | | (739 | ) |
Net income including noncontrolling interests | 51,557 |
| | 41,907 |
| | 141,266 |
| | 121,453 |
|
Less: Net income attributable to noncontrolling interests | (26 | ) | | (385 | ) | | (7 | ) | | (233 | ) |
Net income attributable to EMCOR Group, Inc. | $ | 51,531 |
| | $ | 41,522 |
| | $ | 141,259 |
| | $ | 121,220 |
|
Basic earnings (loss) per common share: | | | | | | | |
From continuing operations attributable to EMCOR Group, Inc. common stockholders | $ | 0.85 |
| | $ | 0.66 |
| | $ | 2.35 |
| | $ | 1.94 |
|
From discontinued operation | (0.01 | ) | | (0.00 | ) | | (0.03 | ) | | (0.01 | ) |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 0.84 |
| | $ | 0.66 |
| | $ | 2.32 |
| | $ | 1.93 |
|
Diluted earnings (loss) per common share: | | | | | | | |
From continuing operations attributable to EMCOR Group, Inc. common stockholders | $ | 0.85 |
| | $ | 0.66 |
| | $ | 2.33 |
| | $ | 1.92 |
|
From discontinued operation | (0.01 | ) | | (0.00 | ) | | (0.03 | ) | | (0.01 | ) |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 0.84 |
| | $ | 0.66 |
| | $ | 2.30 |
| | $ | 1.91 |
|
| | | | | | | |
Dividends declared per common share | $ | 0.08 |
| | $ | 0.08 |
| | $ | 0.24 |
| | $ | 0.24 |
|
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income including noncontrolling interests | $ | 51,557 |
| | $ | 41,907 |
| | $ | 141,266 |
| | $ | 121,453 |
|
Other comprehensive income, net of tax: | | | | | | | |
Foreign currency translation adjustments | (255 | ) | | 110 |
| | (1,056 | ) | | (78 | ) |
Post retirement plans, amortization of actuarial loss included in net income (1) | 440 |
| | 554 |
| | 1,393 |
| | 1,646 |
|
Other comprehensive income | 185 |
| | 664 |
| | 337 |
| | 1,568 |
|
Comprehensive income | 51,742 |
| | 42,571 |
| | 141,603 |
| | 123,021 |
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Less: Comprehensive income attributable to noncontrolling interests | (26 | ) | | (385 | ) | | (7 | ) | | (233 | ) |
Comprehensive income attributable to EMCOR Group, Inc. | $ | 51,716 |
| | $ | 42,186 |
| | $ | 141,596 |
| | $ | 122,788 |
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_________
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(1) | Net of tax of $0.1 million and $0.2 million for the three months ended September 30, 2016 and 2015, respectively, and net of tax of $0.4 million and $0.5 million for the nine months ended September 30, 2016 and 2015, respectively. |
See Notes to Condensed Consolidated Financial Statements.
EMCOR Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)(Unaudited)
|
| | | | | | | |
| Nine months ended September 30, |
| 2016 | | 2015 |
Cash flows - operating activities: | | | |
Net income including noncontrolling interests | $ | 141,266 |
| | $ | 121,453 |
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Depreciation and amortization | 29,117 |
| | 26,806 |
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Amortization of identifiable intangible assets | 30,678 |
| | 28,391 |
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Provision for doubtful accounts | 3,962 |
| | 2,364 |
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Deferred income taxes | (830 | ) | | (3,598 | ) |
Excess tax benefits from share-based compensation | (2,062 | ) | | (1,306 | ) |
Equity income from unconsolidated entities | (719 | ) | | (1,634 | ) |
Other non-cash items | 6,844 |
| | 7,349 |
|
Distributions from unconsolidated entities | 863 |
| | 3,316 |
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Changes in operating assets and liabilities, excluding the effect of businesses acquired | (80,195 | ) | | (87,560 | ) |
Net cash provided by operating activities | 128,924 |
| | 95,581 |
|
Cash flows - investing activities: | | | |
Payments for acquisitions of businesses, net of cash acquired | (232,883 | ) | | (2,357 | ) |
Proceeds from sale of property, plant and equipment | 1,850 |
| | 2,921 |
|
Purchase of property, plant and equipment | (29,306 | ) | | (22,862 | ) |
Net cash used in investing activities | (260,339 | ) | | (22,298 | ) |
Cash flows - financing activities: | | | |
Proceeds from revolving credit facility | 220,000 |
| | — |
|
Repayments of revolving credit facility | (95,000 | ) | | — |
|
Borrowings from long-term debt | 400,000 |
| | — |
|
Repayments of long-term debt and debt issuance costs | (317,987 | ) | | (13,136 | ) |
Repayments of capital lease obligations | (1,144 | ) | | (2,190 | ) |
Dividends paid to stockholders | (14,598 | ) | | (15,078 | ) |
Repurchase of common stock | (34,805 | ) | | (21,148 | ) |
Proceeds from exercise of stock options | 508 |
| | 2,378 |
|
Payments to satisfy minimum tax withholding | (4,166 | ) | | (3,866 | ) |
Issuance of common stock under employee stock purchase plan | 3,583 |
| | 3,147 |
|
Payments for contingent consideration arrangements | — |
| | (403 | ) |
Distributions to noncontrolling interests | (2,050 | ) | | (9,750 | ) |
Excess tax benefits from share-based compensation | — |
| | 1,306 |
|
Net cash provided by (used in) financing activities | 154,341 |
| | (58,740 | ) |
Effect of exchange rate changes on cash and cash equivalents | (5,199 | ) | | (1,199 | ) |
Increase in cash and cash equivalents | 17,727 |
| | 13,344 |
|
Cash and cash equivalents at beginning of year | 486,831 |
| | 432,056 |
|
Cash and cash equivalents at end of period | $ | 504,558 |
| | $ | 445,400 |
|
Supplemental cash flow information: | | | |
Cash paid for: | | | |
Interest | $ | 7,920 |
| | $ | 5,539 |
|
Income taxes | $ | 98,176 |
| | $ | 72,277 |
|
Non-cash financing activities: | | | |
Assets acquired under capital lease obligations | $ | 1,738 |
| | $ | 1,686 |
|
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, 2014 | $ | 1,429,387 |
| | $ | 636 |
| | $ | 227,885 |
| | $ | (83,197 | ) | | $ | 1,280,991 |
| | $ | (10,302 | ) | | $ | 13,374 |
|
Net income including noncontrolling interests | 121,453 |
| | — |
| | — |
| | — |
| | 121,220 |
| | — |
| | 233 |
|
Other comprehensive income | 1,568 |
| | — |
| | — |
| | 1,568 |
| | — |
| | — |
| | — |
|
Common stock issued under share-based compensation plans (2) | 3,619 |
| | 4 |
| | 3,615 |
| | — |
| | — |
| | — |
| | — |
|
Tax withholding for common stock issued under share-based compensation plans | (3,866 | ) | | — |
| | (3,866 | ) | | — |
| | — |
| | — |
| | — |
|
Common stock issued under employee stock purchase plan | 3,147 |
| | — |
| | 3,147 |
| | — |
| | — |
| | — |
| | — |
|
Common stock dividends | (15,078 | ) | | — |
| | 156 |
| | — |
| | (15,234 | ) | | — |
| | — |
|
Repurchase of common stock | (22,972 | ) | | (5 | ) | | (22,967 | ) | | — |
| | — |
| | — |
| | — |
|
Distributions to noncontrolling interests | (9,750 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (9,750 | ) |
Share-based compensation expense | 6,661 |
| | — |
| | 6,661 |
| | — |
| | — |
| | — |
| | — |
|
Balance, September 30, 2015 | $ | 1,514,169 |
| | $ | 635 |
| | $ | 214,631 |
| | $ | (81,629 | ) | | $ | 1,386,977 |
| | $ | (10,302 | ) | | $ | 3,857 |
|
Balance, December 31, 2015 | $ | 1,480,056 |
| | $ | 617 |
| | $ | 130,369 |
| | $ | (76,953 | ) | | $ | 1,432,980 |
| | $ | (10,302 | ) | | $ | 3,345 |
|
Net income including noncontrolling interests | 141,266 |
| | — |
| | — |
| | — |
| | 141,259 |
| | — |
| | 7 |
|
Other comprehensive income | 337 |
| | — |
| | — |
| | 337 |
| | — |
| | — |
| | — |
|
Common stock issued under share-based compensation plans (3) | 1,492 |
| | 3 |
| | 498 |
| | — |
| | 991 |
| | — |
| | — |
|
Tax withholding for common stock issued under share-based compensation plans | (4,166 | ) | | — |
| | (4,166 | ) | | — |
| | — |
| | — |
| | — |
|
Common stock issued under employee stock purchase plan | 3,583 |
| | — |
| | 3,583 |
| | — |
| | — |
| | — |
| | — |
|
Common stock dividends | (14,598 | ) | | — |
| | 143 |
| | — |
| | (14,741 | ) | | — |
| | — |
|
Repurchase of common stock | (29,028 | ) | | (6 | ) | | (29,022 | ) | | — |
| | — |
| | — |
| | — |
|
Distributions to noncontrolling interests | (2,050 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,050 | ) |
Share-based compensation expense | 7,000 |
| | — |
| | 7,000 |
| | — |
| | — |
| | — |
| | — |
|
Balance, September 30, 2016 | $ | 1,583,892 |
| | $ | 614 |
| | $ | 108,405 |
| | $ | (76,616 | ) | | $ | 1,560,489 |
| | $ | (10,302 | ) | | $ | 1,302 |
|
| |
(1) | Represents cumulative foreign currency translation adjustments and post retirement liability adjustments. |
| |
(2) | Includes the tax benefit associated with share-based compensation of $1.2 million for the nine months ended September 30, 2015. |
| |
(3) | Includes a $1.0 million adjustment to retained earnings to recognize net operating loss carryforwards attributable to excess tax benefits on stock compensation upon the adoption of Accounting Standards Update No. 2016-09. |
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 and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016.
NOTE 2 New Accounting Pronouncements
In March 2016, we adopted the accounting pronouncement issued by the Financial Accounting Standards Board (“FASB”) to update guidance on how companies account for certain aspects of share-based payments to employees. This pronouncement is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. This guidance requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled and changes the presentation of excess tax benefits on the statement of cash flows. We adopted these provisions on a prospective basis. In addition, this pronouncement changes guidance on: (a) accounting for forfeitures of share-based awards and (b) employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation. As a result of the adoption, we recorded an adjustment to retained earnings of $1.0 million to recognize net operating loss carryforwards, net of a valuation allowance, attributable to excess tax benefits on stock compensation that had not been previously recognized to additional paid in capital. The adoption of this pronouncement did not have a material impact on our financial position and/or results of operations.
In February 2016, an accounting pronouncement was issued by the FASB to replace existing lease accounting guidance. This pronouncement is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet for most leases. Expenses associated with leases will continue to be recognized in a manner similar to current accounting guidance. This pronouncement is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The adoption is required to be applied on a modified retrospective basis for each prior reporting period presented. We have not yet determined the effect that the adoption of this pronouncement may have on our financial position and/or results of operations.
On January 1, 2016, we adopted the accounting pronouncement issued by the FASB which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The adoption of this pronouncement did not have a material impact on our financial position and/or results of operations.
On January 1, 2016, we adopted the accounting pronouncement issued by the FASB to update the guidance related to the presentation of debt issuance costs. This guidance requires debt issuance costs, related to a recognized debt liability, be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than being presented as an asset. We adopted this pronouncement on a retrospective basis, and the adoption did not have a material impact on our financial position and/or results of operations.
In November 2015, an accounting pronouncement was issued by the FASB to simplify the presentation of deferred income taxes within the balance sheet. This pronouncement eliminates the requirement that deferred tax assets and liabilities are presented as current or noncurrent based on the nature of the underlying assets and liabilities. Instead, the pronouncement requires all deferred tax assets and liabilities, including valuation allowances, be classified as noncurrent. This pronouncement is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We intend to adopt this pronouncement on January 1, 2017, and the adoption will not have a material impact on our financial position and/or results of operations.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 2 New Accounting Pronouncements - (Continued)
In May 2014, an accounting pronouncement was issued by the 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, 2017, with 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 April 15, 2016, we completed the acquisition of Ardent Services, L.L.C. and Rabalais Constructors, LLC (collectively, “Ardent”). This acquisition has been included in our United States electrical construction and facilities services segment. Ardent provides electrical and instrumentation services to the energy infrastructure market in North America, and this acquisition further strengthens our position in electrical construction and services and broadens our capabilities across the industrial and energy sectors, especially in the Gulf Coast, Midwest and Western regions of the United States. Under the terms of the transaction, we acquired 100% of Ardent’s equity interests for total consideration of $201.4 million. In connection with the acquisition of Ardent, we acquired working capital of $36.5 million and other net assets of $3.9 million and have preliminarily ascribed $119.5 million to goodwill and $41.5 million to identifiable intangible assets. Goodwill is calculated as the excess of the consideration transferred over the net assets acquired and represents the future economic benefits expected from this strategic acquisition. We expect that $99.7 million of the acquired goodwill will be deductible for tax purposes. The weighted average amortization period for the identifiable intangible assets is approximately 13.5 years.
On April 1, 2016, we acquired a company for an immaterial amount. This company provides mobile mechanical services within the Southeastern region of the United States, and its results have been included in our United States building services segment.
On June 1, 2015 and October 13, 2015, we acquired two companies, each for an immaterial amount. These companies primarily provide mechanical construction services, and their results have been included in our United States mechanical construction and facilities services segment.
The purchase price allocations for the businesses acquired in 2016 are still preliminary and subject to change during their respective measurement periods. 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 value of their assets and liabilities at the dates of their respective acquisitions.
NOTE 4 Disposition of Assets
Due to a historical pattern of losses 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, we announced during the quarter ended June 30, 2013 our decision to withdraw from the construction market in the United Kingdom. During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented in our Condensed Consolidated Financial Statements as discontinued operations.
The results of discontinued operations are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues | $ | 40 |
| | $ | 149 |
| | $ | 108 |
| | $ | 509 |
|
Loss from discontinued operation, net of income taxes | $ | (406 | ) | | $ | (270 | ) | | $ | (1,584 | ) | | $ | (739 | ) |
Diluted loss per share from discontinued operation | $ | (0.01 | ) | | $ | (0.00 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) |
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 4 Disposition of Assets - (Continued)
Included in the Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 are the following major classes of assets and liabilities associated with the discontinued operation (in thousands):
|
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
Assets of discontinued operation: | | | |
Current assets | $ | 1,689 |
| | $ | 2,525 |
|
| | | |
Liabilities of discontinued operation: | | | |
Current liabilities | $ | 3,644 |
| | $ | 4,407 |
|
At September 30, 2016, the assets and liabilities of the discontinued operation consisted of accounts receivable, contract retentions and contract warranty obligations that are expected to be collected or fulfilled in the ordinary course of business. Additionally at September 30, 2016, there remained $0.1 million of obligations related to employee severance, which are expected to be paid in 2017. The settlement of the remaining assets and liabilities may result in additional income and/or expenses. Such income and/or expenses are expected to be immaterial and will be reflected as discontinued operations as incurred.
NOTE 5 Earnings Per Share
Calculation of Basic and Diluted Earnings (Loss) per Common Share
The following tables summarize our calculation of Basic and Diluted Earnings (Loss) per Common Share (“EPS”) for the three and nine months ended September 30, 2016 and 2015 (in thousands, except share and per share data):
|
| | | | | | | |
| For the three months ended September 30, |
| 2016 | | 2015 |
Numerator: | | | |
Income from continuing operations attributable to EMCOR Group, Inc. common stockholders | $ | 51,937 |
| | $ | 41,792 |
|
Loss from discontinued operation, net of income taxes | (406 | ) | | (270 | ) |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 51,531 |
| | $ | 41,522 |
|
Denominator: | | | |
Weighted average shares outstanding used to compute basic earnings (loss) per common share | 60,889,484 |
| | 62,901,923 |
|
Effect of dilutive securities—Share-based awards | 428,573 |
| | 490,560 |
|
Shares used to compute diluted earnings (loss) per common share | 61,318,057 |
| | 63,392,483 |
|
Basic earnings (loss) per common share: | | | |
From continuing operations attributable to EMCOR Group, Inc. common stockholders | $ | 0.85 |
| | $ | 0.66 |
|
From discontinued operation | $ | (0.01 | ) | | $ | (0.00 | ) |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 0.84 |
| | $ | 0.66 |
|
Diluted earnings (loss) per common share: | | | |
From continuing operations attributable to EMCOR Group, Inc. common stockholders | $ | 0.85 |
| | $ | 0.66 |
|
From discontinued operation | $ | (0.01 | ) | | $ | (0.00 | ) |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 0.84 |
| | $ | 0.66 |
|
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 5 Earnings Per Share - (Continued)
|
| | | | | | | |
| For the nine months ended September 30, |
| 2016 | | 2015 |
Numerator: | | | |
Income from continuing operations attributable to EMCOR Group, Inc. common stockholders | $ | 142,843 |
| | $ | 121,959 |
|
Loss from discontinued operation, net of income taxes | (1,584 | ) | | (739 | ) |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 141,259 |
| | $ | 121,220 |
|
Denominator: | | | |
Weighted average shares outstanding used to compute basic earnings (loss) per common share | 60,866,532 |
| | 62,921,956 |
|
Effect of dilutive securities—Share-based awards | 423,856 |
| | 521,071 |
|
Shares used to compute diluted earnings (loss) per common share | 61,290,388 |
| | 63,443,027 |
|
Basic earnings (loss) per common share: | | | |
From continuing operations attributable to EMCOR Group, Inc. common stockholders | $ | 2.35 |
| | $ | 1.94 |
|
From discontinued operation | $ | (0.03 | ) | | $ | (0.01 | ) |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 2.32 |
| | $ | 1.93 |
|
Diluted earnings (loss) per common share: | | | |
From continuing operations attributable to EMCOR Group, Inc. common stockholders | $ | 2.33 |
| | $ | 1.92 |
|
From discontinued operation | $ | (0.03 | ) | | $ | (0.01 | ) |
Net income attributable to EMCOR Group, Inc. common stockholders | $ | 2.30 |
| | $ | 1.91 |
|
There were no anti-dilutive share-based awards for the three and nine months ended September 30, 2016 and 2015, respectively.
NOTE 6 Inventories
Inventories in the accompanying Condensed Consolidated Balance Sheets consisted of the following amounts (in thousands):
|
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
Raw materials and construction materials | $ | 24,144 |
| | $ | 23,239 |
|
Work in process | 19,769 |
| | 14,306 |
|
| $ | 43,913 |
| | $ | 37,545 |
|
NOTE 7 Debt
Debt in the accompanying Condensed Consolidated Balance Sheets consisted of the following amounts (in thousands):
|
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
Revolving credit facility | $ | 125,000 |
| | $ | — |
|
Term loan | 400,000 |
| | 315,000 |
|
Unamortized debt issuance costs | (5,734 | ) | | (3,813 | ) |
Capitalized lease obligations | 3,977 |
| | 3,869 |
|
Other | 34 |
| | 44 |
|
| 523,277 |
| | 315,100 |
|
Less: current maturities | 19,889 |
| | 17,541 |
|
| $ | 503,388 |
| | $ | 297,559 |
|
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 7 Debt - (Continued)
Credit Facilities
Until August 3, 2016, we had a credit agreement (the “2013 Credit Agreement”), as amended, which provided for a revolving credit facility of $750.0 million (the “2013 Revolving Credit Facility”) and a term loan of $350.0 million (the “2013 Term Loan”). The 2013 Credit Agreement was effective November 25, 2013. Effective August 3, 2016, we amended and restated the 2013 Credit Agreement to provide for a $900.0 million revolving credit facility (the “2016 Revolving Credit Facility”) and a $400.0 million term loan (the “2016 Term Loan”) (collectively referred to as the “2016 Credit Agreement”) expiring August 3, 2021. The proceeds of the 2016 Term Loan were used to repay amounts drawn under the 2013 Term Loan, as well as a portion of the outstanding balance under the 2013 Revolving Credit Facility. We may increase the 2016 Revolving Credit Facility to $1.3 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $300.0 million of available capacity under the 2016 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries. Obligations under the 2016 Credit Agreement are 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 2016 Credit Agreement contains 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. We were in compliance with all such covenants as of September 30, 2016 with respect to the 2016 Credit Agreement and December 31, 2015 with respect to the 2013 Credit Agreement. A commitment fee is payable on the average daily unused amount of the 2016 Revolving Credit Facility, which ranges from 0.15% to 0.30%, based on certain financial tests. The fee was 0.20% of the unused amount as of September 30, 2016. Borrowings under the 2016 Credit Agreement bear interest at (1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2) United States dollar LIBOR (0.52% at September 30, 2016) plus 1.00% to 1.75%, based on certain financial tests. The base rate is determined by the greater of (a) the prime commercial lending rate announced by Bank of Montreal from time to time (3.50% at September 30, 2016), (b) the federal funds effective rate, plus ½ of 1.00%, (c) the daily one month LIBOR rate, plus 1.00%, or (d) 0.00%. The interest rate in effect at September 30, 2016 was 1.77%. Fees for letters of credit issued under the 2016 Revolving Credit Facility range from 1.00% to 1.75% of the respective face amounts of outstanding letters of credit and are computed based on certain financial tests. We capitalized an additional $3.0 million of debt issuance costs associated with the 2016 Credit Agreement. Debt issuance costs are amortized over the life of the agreement and are included as part of interest expense. In connection with the amendment and restatement of the 2013 Credit Agreement, $0.1 million attributable to the acceleration of expense for debt issuance costs in connection with the 2013 Credit Agreement was recorded as part of interest expense during the third quarter of 2016. We are required to make principal payments on the 2016 Term Loan in installments on the last day of March, June, September and December of each year, commencing with the calendar quarter ending December 31, 2016, in the amount of $5.0 million, with a payment of all unpaid principal and interest due on August 3, 2021. As of September 30, 2016 and December 31, 2015, the balance of the 2016 Term Loan and the 2013 Term Loan was $400.0 million and $315.0 million, respectively. As of September 30, 2016 and December 31, 2015, we had approximately $115.4 million and $99.0 million of letters of credit outstanding, respectively. There were $125.0 million in borrowings outstanding under the 2016 Revolving Credit Facility as of September 30, 2016. There were no borrowings outstanding under the 2013 Revolving Credit Facility as of December 31, 2015.
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.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 8 Fair Value Measurements - (Continued)
The following tables provide the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2016 and December 31, 2015 (in thousands):
|
| | | | | | | | | | | | | | | |
| Assets at Fair Value as of September 30, 2016 |
Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents (1) | $ | 504,558 |
| | $ | — |
| | $ | — |
| | $ | 504,558 |
|
Restricted cash (2) | 2,224 |
| | — |
| | — |
| | 2,224 |
|
Deferred compensation plan assets (3) | 11,701 |
| | — |
| | — |
| | 11,701 |
|
Total | $ | 518,483 |
| | $ | — |
| | $ | — |
| | $ | 518,483 |
|
|
| | | | | | | | | | | | | | | |
| Assets at Fair Value as of December 31, 2015 |
Asset Category | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents (1) | $ | 486,831 |
| | $ | — |
| | $ | — |
| | $ | 486,831 |
|
Restricted cash (2) | 4,232 |
| | — |
| | — |
| | 4,232 |
|
Deferred compensation plan assets (3) | 7,497 |
| | — |
| | — |
| | 7,497 |
|
Total | $ | 498,560 |
| | $ | — |
| | $ | — |
| | $ | 498,560 |
|
________
| |
(1) | Cash and cash equivalents include money market funds with original maturity dates of three months or less, which are Level 1 assets. At September 30, 2016 and December 31, 2015, we had $157.6 million and $151.4 million, respectively, in money market funds. |
| |
(2) | Restricted cash is classified as “Prepaid expenses and other” in the Condensed Consolidated Balance Sheets. |
| |
(3) | Deferred compensation plan assets are classified as “Other assets” 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 debt associated with the 2016 Credit Agreement approximates its fair value due to the variable rate on such debt.
NOTE 9 Income Taxes
For the three months ended September 30, 2016 and 2015, our income tax provision from continuing operations was $30.8 million and $25.7 million, respectively, based on effective income tax rates, before discrete items and less amounts attributable to noncontrolling interests, of 38.1% and 38.0%, respectively. The actual income tax rates on income from continuing operations, less amounts attributable to noncontrolling interests, for the three months ended September 30, 2016 and 2015, inclusive of discrete items, were 37.2% and 38.1%, respectively. For the nine months ended September 30, 2016 and 2015, our income tax provision from continuing operations was $82.7 million and $74.7 million, respectively, based on effective income tax rates, before discrete items and less amounts attributable to noncontrolling interests, of 37.8% and 37.9%, respectively. The actual income tax rates on income from continuing operations, less amounts attributable to noncontrolling interests, for the nine months ended September 30, 2016 and 2015, inclusive of discrete items, were 36.7% and 38.0%, respectively. The increase in the 2016 income tax provision was primarily due to increased income from continuing operations. The decrease in the actual income tax rate on income from continuing operations for the three months ended September 30, 2016 was primarily due to the reversal of $0.8 million of reserves for uncertain income tax positions. The decrease in the actual income tax rate for the nine months ended September 30, 2016 was primarily due to $2.1 million of tax benefits recognized upon the issuance of common stock under share-based compensation plans.
As of September 30, 2016 and December 31, 2015, the amount of unrecognized income tax benefits was $3.9 million and $4.8 million (of which $2.2 million and $3.0 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 September 30, 2016 and December 31, 2015, we had approximately $0.4 million of accrued interest related to unrecognized income tax benefits included as a liability in the Condensed Consolidated Balance Sheets. For each of the three and nine months ended September 30, 2016, less than $0.1 million of interest income was recognized. For each of the three and nine months ended September 30, 2015, less than $0.1 million of interest expense was recognized.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 9 Income Taxes - (Continued)
It is reasonably possible that approximately $3.3 million of unrecognized income tax benefits at September 30, 2016, primarily relating to uncertain tax positions attributable to tax return filing positions, will significantly decrease in the next twelve months as a result of estimated settlements with taxing authorities and the expiration of applicable statutes of limitations.
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 2014.
NOTE 10 Common Stock
As of September 30, 2016 and December 31, 2015, there were 60,786,064 and 61,067,868 shares of our common stock outstanding, respectively.
During the three months ended September 30, 2016 and 2015, 47,050 and 66,223 shares of common stock, respectively, were issued primarily upon: (a) the purchase of common stock pursuant to our employee stock purchase plan, (b) the exercise of stock options and (c) the satisfaction of required conditions under certain of our share-based compensation plans. During the nine months ended September 30, 2016 and 2015, 353,116 and 347,713 shares of common stock, respectively, were issued primarily upon: (a) the satisfaction of required conditions under certain of our share-based compensation plans, (b) the exercise of stock options and (c) the purchase of common stock pursuant to our employee stock purchase plan.
On September 26, 2011, our Board of Directors authorized us to repurchase up to $100.0 million of our outstanding common stock. On December 5, 2013, October 23, 2014 and October 28, 2015, our Board of Directors authorized us to repurchase up to an additional $100.0 million, $250.0 million and $200.0 million of our outstanding common stock, respectively. During 2016, we have repurchased approximately 0.6 million shares of our common stock for approximately $29.0 million. Since the inception of the repurchase programs through September 30, 2016, we have repurchased 10.5 million shares of our common stock for approximately $424.9 million. As of September 30, 2016, there remained authorization for us to repurchase approximately $225.1 million of our shares. 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. We may repurchase our shares 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 UK Plan. On May 31, 2010, we curtailed the future accrual of benefits for active employees under such plan.
Components of Net Periodic Pension Cost
The components of net periodic pension cost of the UK Plan for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Interest cost | $ | 2,465 |
| | $ | 2,938 |
| | $ | 7,846 |
| | $ | 8,718 |
|
Expected return on plan assets | (3,398 | ) | | (4,098 | ) | | (10,816 | ) | | (12,159 | ) |
Amortization of unrecognized loss | 489 |
| | 640 |
| | 1,556 |
| | 1,899 |
|
Net periodic pension cost | $ | (444 | ) | | $ | (520 | ) | | $ | (1,414 | ) | | $ | (1,542 | ) |
Employer Contributions
For the nine months ended September 30, 2016, our United Kingdom subsidiary contributed approximately $3.4 million to the UK Plan and anticipates contributing an additional $1.4 million during the remainder of 2016.
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 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 in 2010. 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) personal injury suffered by individuals as a result of the explosion and (b) the Mechanical Contractor’s legal fees and associated management costs in defending against any and all such claims. In the most recent filing with the arbitrator, the Mechanical Contractor has stated claims against our subsidiary for alleged violations of the Connecticut and Massachusetts Unfair and Deceptive Trade Practices Acts in the ongoing arbitration proceeding. Further, the general contractor (as assignee of the Mechanical Contractor) on the construction project, and for whom the Mechanical Contractor worked, has alleged that our subsidiary is responsible for losses asserted by the owner of the project and/or the general contractor because of delays in completion of the project and for damages to the owner’s property. 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.
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, primarily relating to employee severance obligations, were $0.5 million and $1.3 million for the three and nine months ended September 30, 2016, respectively, and $0.3 million and $0.7 million for the three and nine months ended September 30, 2015, respectively. As of September 30, 2016, the balance of these restructuring obligations yet to be paid was $0.5 million, the majority of which is expected to be paid during 2016. No material expenses in connection with restructuring from continuing operations are expected to be incurred during the remainder of 2016.
The changes in restructuring activity by reportable segments during the nine months ended September 30, 2016 and 2015 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 | | Total |
Balance at December 31, 2014 | $ | 255 |
| | $ | 26 |
| | $ | — |
| | $ | 281 |
|
Charges | (106 | ) | | 6 |
| | 842 |
| | 742 |
|
Payments | (149 | ) | | (32 | ) | | (384 | ) | | (565 | ) |
Balance at September 30, 2015 | $ | — |
| | $ | — |
| | $ | 458 |
| | $ | 458 |
|
Balance at December 31, 2015 | $ | — |
| | $ | — |
| | $ | 81 |
| | $ | 81 |
|
Charges | — |
| | 401 |
| | 870 |
| | 1,271 |
|
Payments | — |
| | (108 | ) | | (770 | ) | | (878 | ) |
Balance at September 30, 2016 | $ | — |
| | $ | 293 |
| | $ | 181 |
| | $ | 474 |
|
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
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; 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 building services. The “United States building services” and “United Kingdom building services” segments principally consist of those operations which provide a portfolio of services needed to support the operation and maintenance of our customers’ facilities, including commercial and government site-based operations and maintenance; facility maintenance and services, including reception, security and catering 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; and small modification and retrofit projects, 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 following tables present information about industry segments and geographic areas for the three and nine months ended September 30, 2016 and 2015 (in thousands):
|
| | | | | | | |
| For the three months ended September 30, |
| 2016 | | 2015 |
Revenues from unrelated entities: | | | |
United States electrical construction and facilities services | $ | 458,553 |
| | $ | 344,389 |
|
United States mechanical construction and facilities services | 697,733 |
| | 587,522 |
|
United States building services | 454,800 |
| | 428,270 |
|
United States industrial services | 239,052 |
| | 241,946 |
|
Total United States operations | 1,850,138 |
| | 1,602,127 |
|
United Kingdom building services | 73,036 |
| | 97,001 |
|
Total worldwide operations | $ | 1,923,174 |
| | $ | 1,699,128 |
|
| | | |
Total revenues: | | | |
United States electrical construction and facilities services | $ | 465,476 |
| | $ | 348,327 |
|
United States mechanical construction and facilities services | 702,464 |
| | 592,077 |
|
United States building services | 469,191 |
| | 442,674 |
|
United States industrial services | 239,489 |
| | 242,335 |
|
Less intersegment revenues | (26,482 | ) | | (23,286 | ) |
Total United States operations | 1,850,138 |
| | 1,602,127 |
|
United Kingdom building services | 73,036 |
| | 97,001 |
|
Total worldwide operations | $ | 1,923,174 |
| | $ | 1,699,128 |
|
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 13 Segment Information - (Continued)
|
| | | | | | | |
| For the nine months ended September 30, |
| 2016 | | 2015 |
Revenues from unrelated entities: | | | |
United States electrical construction and facilities services | $ | 1,227,474 |
| | $ | 1,009,585 |
|
United States mechanical construction and facilities services | 1,939,518 |
| | 1,652,551 |
|
United States building services | 1,353,248 |
| | 1,303,389 |
|
United States industrial services | 830,064 |
| | 699,839 |
|
Total United States operations | 5,350,304 |
| | 4,665,364 |
|
United Kingdom building services | 251,256 |
| | 275,536 |
|
Total worldwide operations | $ | 5,601,560 |
| | $ | 4,940,900 |
|
| | | |
Total revenues: | | | |
United States electrical construction and facilities services | $ | 1,249,681 |
| | $ | 1,016,013 |
|
United States mechanical construction and facilities services | 1,950,814 |
| | 1,663,259 |
|
United States building services | 1,393,636 |
| | 1,341,392 |
|
United States industrial services | 831,111 |
| | 701,226 |
|
Less intersegment revenues | (74,938 | ) | | (56,526 | ) |
Total United States operations | 5,350,304 |
| | 4,665,364 |
|
United Kingdom building services | 251,256 |
| | 275,536 |
|
Total worldwide operations | $ | 5,601,560 |
| | $ | 4,940,900 |
|
|
| | | | | | | |
| For the three months ended September 30, |
| 2016 | | 2015 |
Operating income (loss): | | | |
United States electrical construction and facilities services | $ | 30,927 |
| | $ | 25,528 |
|
United States mechanical construction and facilities services | 39,447 |
| | 26,926 |
|
United States building services | 22,568 |
| | 16,027 |
|
United States industrial services | 14,586 |
| | 14,340 |
|
Total United States operations | 107,528 |
| | 82,821 |
|
United Kingdom building services | 2,591 |
| | 3,358 |
|
Corporate administration | (23,516 | ) | | (15,912 | ) |
Restructuring expenses | (539 | ) | | (301 | ) |
Total worldwide operations | 86,064 |
| | 69,966 |
|
Other corporate items: | | | |
Interest expense | (3,479 | ) | | (2,226 | ) |
Interest income | 161 |
| | 157 |
|
Income from continuing operations before income taxes | $ | 82,746 |
| | $ | 67,897 |
|
EMCOR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 13 Segment Information - (Continued)
|
| | | | | | | |
| For the nine months ended September 30, |
| 2016 | | 2015 |
Operating income (loss): | | | |
United States electrical construction and facilities services | $ | 70,645 |
| | $ | 67,479 |
|
United States mechanical construction and facilities services | 101,504 |
| | 80,191 |
|
United States building services | 54,761 |
| | 54,944 |
|
United States industrial services | 66,600 |
| | 44,588 |
|
Total United States operations | 293,510 |
| | 247,202 |
|
United Kingdom building services | 9,160 |
| | 8,570 |
|
Corporate administration | (67,431 | ) | | (52,031 | ) |
Restructuring expenses | (1,271 | ) | | (742 | ) |
Total worldwide operations | 233,968 |
| | 202,999 |
|
Other corporate items: | | | |
Interest expense | (8,973 | ) | | (6,650 | ) |
Interest income | 518 |
| | 515 |
|
Income from continuing operations before income taxes | $ | 225,513 |
| | $ | 196,864 |
|
|
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
Total assets: | | | |
United States electrical construction and facilities services | $ | 623,446 |
| | $ | 372,525 |
|
United States mechanical construction and facilities services | 929,994 |
| | 894,366 |
|
United States building services | 778,507 |
| | 721,653 |
|
United States industrial services | 898,662 |
| | 883,338 |
|
Total United States operations | 3,230,609 |
| | 2,871,882 |
|
United Kingdom building services | 108,836 |
| | 133,782 |
|
Corporate administration | 555,508 |
| | 536,993 |
|
Total worldwide operations | $ | 3,894,953 |
| | $ | 3,542,657 |
|
|
| |
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 75 operating subsidiaries and joint venture entities. Our offices are located in the United States and the United Kingdom.
During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented in our Condensed Consolidated Financial Statements as discontinued operations.
Impact of Acquisitions
In order to provide a more meaningful period-over-period discussion of our operating results, we may discuss amounts generated or incurred (revenues, gross profit, selling, general and administrative expenses and operating income) from companies acquired. The amounts discussed reflect the acquired companies’ operating results in the current reported period only for the time period these entities were not owned by EMCOR in the comparable prior reported period.
Overview
The following table presents selected financial data for the three months ended September 30, 2016 and 2015 (in thousands, except percentages and per share data):
|
| | | | | | | |
| For the three months ended September 30, |
| 2016 | | 2015 |
Revenues | $ | 1,923,174 |
| | $ | 1,699,128 |
|
Revenues increase from prior year | 13.2 | % | | 8.5 | % |
Operating income | $ | 86,064 |
| | $ | 69,966 |
|
Operating income as a percentage of revenues | 4.5 | % | | 4.1 | % |
Net income attributable to EMCOR Group, Inc. | $ | 51,531 |
| | $ | 41,522 |
|
Diluted earnings per common share from continuing operations | $ | 0.85 |
| | $ | 0.66 |
|
The results of our operations for the 2016 third quarter set new company records in terms of revenues, operating income, net income attributable to EMCOR Group, Inc. and diluted earnings per common share from continuing operations for a third quarter. Revenues increased within all of our reportable segments, except for our United Kingdom building services segment and our United States industrial services segment. The increase in revenues was attributable to: (a) our domestic construction segments, due to increased activity within the majority of the market sectors in which we operate, and (b) our United States building services segment, primarily due to higher volume within its mobile mechanical services operations. In addition, companies acquired in 2016 and 2015, which are reported in our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, and our United States building services segment, generated incremental revenues of $90.8 million. The decrease in revenues from our United Kingdom building services segment was due to the effect of unfavorable exchange rates for the British pound versus the United States dollar and a decrease in project activity within the commercial market sector.
Operating income increased within all of our reportable segments, except for our United Kingdom building services segment. Our operating income was favorably impacted by: (a) our United States mechanical construction and facilities services segment, primarily attributable to an increase in gross profit from commercial and manufacturing construction projects, and (b) our United States building services segment, predominately as a result of increased gross profit within our mobile mechanical services operations. In addition, companies acquired in 2016 and 2015 generated operating income of $9.1 million, net of $1.4 million of amortization expense associated with identifiable intangible assets. Corporate administration operating loss increased as a result of: (a) an increase in employment costs, such as incentive compensation, primarily due to higher projected annual operating results than in the same prior year period, and (b) an increase in certain non-income related taxes, (c) an increase in software licensing costs and (d) an increase in legal costs.
Our operating margin (operating income as a percentage of revenues) for the three months ended September 30, 2016 was 4.5% compared to operating margin of 4.1% for the three months ended September 30, 2015. Operating margin increases within our United States building services segment, our United States mechanical construction and facilities services segment and our United States industrial services segment were offset by a decrease in operating margin within our United States electrical construction and facilities services segment.
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; 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 building services. The “United States building services” and “United Kingdom building services” segments principally consist of those operations which provide a portfolio of services needed to support the operation and maintenance of our customers’ facilities, including commercial and government site-based operations and maintenance; facility maintenance and services, including reception, security and catering 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; and small modification and retrofit projects, 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.
Results of Operations
Revenues
The following tables present our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages):
|
| | | | | | | | | | | | | |
| For the three months ended September 30, |
| 2016 | | % of Total | | 2015 | | % of Total |
Revenues: | | | | | | | |
United States electrical construction and facilities services | $ | 458,553 |
| | 24 | % | | $ | 344,389 |
| | 20 | % |
United States mechanical construction and facilities services | 697,733 |
| | 36 | % | | 587,522 |
| | 35 | % |
United States building services | 454,800 |
| | 24 | % | | 428,270 |
| | 25 | % |
United States industrial services | 239,052 |
| | 12 | % | | 241,946 |
| | 14 | % |
Total United States operations | 1,850,138 |
| | 96 | % | | 1,602,127 |
| | 94 | % |
United Kingdom building services | 73,036 |
| | 4 | % | | 97,001 |
| | 6 | % |
Total worldwide operations | $ | 1,923,174 |
| | 100 | % | | $ | 1,699,128 |
| | 100 | % |
|
| | | | | | | | | | | | | |
| For the nine months ended September 30, |
| 2016 | | % of Total | | 2015 | | % of Total |
Revenues: | | | | | | | |
United States electrical construction and facilities services | $ | 1,227,474 |
| | 22 | % | | $ | 1,009,585 |
| | 20 | % |
United States mechanical construction and facilities services | 1,939,518 |
| | 35 | % | | 1,652,551 |
| | 33 | % |
United States building services | 1,353,248 |
| | 24 | % | | 1,303,389 |
| | 26 | % |
United States industrial services | 830,064 |
| | 15 | % | | 699,839 |
| | 14 | % |
Total United States operations | 5,350,304 |
| | 96 | % | | 4,665,364 |
| | 94 | % |
United Kingdom building services | 251,256 |
| | 4 | % | | 275,536 |
| | 6 | % |
Total worldwide operations | $ | 5,601,560 |
| | 100 | % | | $ | 4,940,900 |
| | 100 | % |
As described below in more detail, our revenues for the three months ended September 30, 2016 increased to $1.92 billion compared to $1.70 billion for the three months ended September 30, 2015, and our revenues for the nine months ended September 30, 2016 increased to $5.60 billion compared to $4.94 billion for the nine months ended September 30, 2015. The increase in revenues for both periods was primarily attributable to: (a) increased revenues from both of our domestic construction segments, (b) increased demand for our industrial field services within our United States industrial services segment and (c) increased revenues from our mobile mechanical services operations within our United States building services segment. In addition, companies acquired in 2016 and 2015, which are reported in our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment and our United States building services segment, generated incremental revenues of $90.8 million and $179.7 million for the three and nine months ended September 30, 2016, respectively.
Revenues of our United States electrical construction and facilities services segment were $458.6 million and $1,227.5 million for the three and nine months ended September 30, 2016, respectively, compared to revenues of $344.4 million and $1,009.6 million for the three and nine months ended September 30, 2015, respectively. Excluding the acquisition of Ardent Services, L.L.C. and Rabalais Constructors, LLC (collectively, “Ardent”), the increase in revenues for both periods was primarily attributable to an increase in revenues from commercial and transportation construction projects, partially offset by a decrease in revenues from healthcare construction projects. Additionally, the increase in revenues for the nine months ended September 30, 2016 was partially attributable to an increase in revenues from hospitality construction contracts. The results for the three and nine months ended September 30, 2016 included $58.6 million and $104.0 million, respectively, of revenues generated by Ardent.
Our United States mechanical construction and facilities services segment revenues for the three months ended September 30, 2016 were $697.7 million, a $110.2 million increase compared to revenues of $587.5 million for the three months ended September 30, 2015. Revenues of this segment for the nine months ended September 30, 2016 were $1,939.5 million, a $287.0 million increase compared to revenues of $1,652.6 million for the nine months ended September 30, 2015. The increase in revenues for both periods was primarily attributable to an increase in activity within the majority of the market sectors in which we operate. The results for the three and nine months ended September 30, 2016 included $14.9 million and $43.3 million, respectively, of revenues generated by companies acquired in 2015.
Revenues of our United States building services segment for the three months ended September 30, 2016 increased by $26.5 million compared to the three months ended September 30, 2015, and revenues for the nine months ended September 30, 2016 increased by $49.9 million compared to the nine months ended September 30, 2015. The increase in revenues for both periods was primarily attributable to increased revenues from: (a) our mobile mechanical services operations as a result of greater project, service and controls activities and (b) our energy services operations, as a result of an increase in large project activity. The results for the three and nine months ended September 30, 2016 included $17.3 million and $32.4 million, respectively, of revenues generated by a company acquired in 2016. These increases were partially offset by a decrease in revenues from our government site-based services operations as a result of the loss of certain contracts not renewed pursuant to rebid and certain scope reductions within their current contract portfolio.
Revenues of our United States industrial services segment for the three months ended September 30, 2016 decreased by $2.9 million compared to the three months ended September 30, 2015, and revenues for the nine months ended September 30, 2016 increased by $130.2 million compared to the nine months ended September 30, 2015. The decrease in revenues for the three months ended September 30, 2016 was attributable to a decrease in revenues from our shop services operations due to lower demand for new heat exchangers as a result of a curtailment in capital spending by most large integrated oil companies, partially offset by increased demand for our field services offerings. The increase in revenues for the nine months ended September 30, 2016 was due to increased demand for specialty services offerings within our field services operations, including large project activity, partially offset by a decrease in revenues from our shop services operations. In addition, revenues for the nine months
ended September 30, 2015 were negatively impacted by a nationwide strike by union employees of certain major oil refineries which led to the loss and deferral of certain turnaround projects.
Our United Kingdom building services segment revenues were $73.0 million for the three months ended September 30, 2016 compared to revenues of $97.0 million for the three months ended September 30, 2015, and revenues were $251.3 million for the nine months ended September 30, 2016 compared to revenues of $275.5 million for the nine months ended September 30, 2015. This segment’s revenues decreased by $13.2 million and $24.5 million for the three and nine months ended September 30, 2016, respectively, related to the effect of unfavorable exchange rates for the British pound versus the United States dollar resulting, in part, from the decision by the United Kingdom to exit the European Union. Additionally, the decrease in revenues for the three months ended September 30, 2016 was partially attributable to a decrease in project activity within the commercial market sector.
Backlog
The following table presents our operating segment backlog from unrelated entities and their respective percentages of total backlog (in thousands, except for percentages):
|
| | | | | | | | | | | | | | | | | | | | |
| September 30, 2016 | | % of Total | | December 31, 2015 | | % of Total | | September 30, 2015 | | % of Total |
Backlog: | | | | | | | | | | | |
United States electrical construction and facilities services | $ | 1,154,939 |
| | 30 | % | | $ | 1,145,791 |
| | 30 | % | | $ | 1,163,986 |
| | 31 | % |
United States mechanical construction and facilities services | 1,841,132 |
| | 47 | % | | 1,683,501 |
| | 45 | % | | 1,653,393 |
| | 44 | % |
United States building services | 699,391 |
| | 18 | % | | 762,196 |
| | 20 | % | | 725,257 |
| | 19 | % |
United States industrial services | 51,200 |
| | 1 | % | | 54,578 |
| | 1 | % | | 72,691 |
| | 2 | % |
Total United States operations | 3,746,662 |
| | 96 | % | | 3,646,066 |
| | 97 | % | | 3,615,327 |
| | 96 | % |
United Kingdom building services | 156,032 |
| | 4 | % | | 125,097 |
| | 3 | % | | 149,891 |
| | 4 | % |
Total worldwide operations | $ | 3,902,694 |
| | 100 | % | | $ | 3,771,163 |
| | 100 | % | | $ | 3,765,218 |
| | 100 | % |
Our backlog at September 30, 2016 was $3.90 billion compared to $3.77 billion at December 31, 2015 and $3.77 billion at September 30, 2015. The increase in backlog at September 30, 2016 compared to backlog at December 31, 2015 was primarily attributable to an increase in backlog from all of our reportable segments, except for our United States building services segment and our United States industrial 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 and agreement on contract terms has been reached. 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 a fixed amount cannot be determined, 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 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 September 30, | | For the nine months ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Cost of sales | $ | 1,655,130 |
| | $ | 1,463,726 |
| | $ | 4,835,667 |
| | $ | 4,249,042 |
|
Gross profit | $ | 268,044 |
| | $ | 235,402 |
| | $ | 765,893 |
| | $ | 691,858 |
|
Gross profit, as a percentage of revenues | 13.9 | % | | 13.9 | % | | 13.7 | % | | 14.0 | % |
Our gross profit increased by $32.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. Gross profit increased by $74.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase in gross profit for the three months ended September 30, 2016 was attributable to increases in gross profit within all of our reportable segments, except for our United Kingdom building services segment and our United States industrial services segment. The increase in gross profit for the nine months ended September 30, 2016 was attributable to increases in gross profit within all of our reportable segments, except for our United Kingdom building services segment. Our gross profit margin was 13.9% and 13.9% for the three months ended September 30, 2016 and 2015, respectively. Gross profit margin was 13.7% and 14.0% for the nine months ended September 30, 2016 and 2015, respectively. Gross profit margin for the nine months ended September 30, 2016 was negatively impacted by $6.9 million and $17.4 million of losses incurred on a transportation construction project in the Northeastern United States within our United States electrical construction and facilities services segment, resulting in a 0.3% negative impact on the Company’s gross profit margin for both the three and nine months ended September 30, 2016.
Selling, general and administrative expenses
The following table presents our selling, general and administrative expenses and SG&A margin (selling, general and administrative expenses as a percentage of revenues) (in thousands, except for percentages):
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Selling, general and administrative expenses | $ | 181,441 |
| | $ | 165,135 |
| | $ | 530,654 |
| | $ | 488,117 |
|
Selling, general and administrative expenses, as a percentage of revenues | 9.4 | % | | 9.7 | % | | 9.5 | % | | 9.9 | % |
Our selling, general and administrative expenses for the three months ended September 30, 2016 increased by $16.3 million to $181.4 million compared to $165.1 million for the three months ended September 30, 2015. Selling, general and administrative expenses for the nine months ended September 30, 2016 increased by $42.5 million to $530.7 million compared to $488.1 million for the nine months ended September 30, 2015. Selling, general and administrative expenses as a percentage of revenues were 9.4% and 9.5% for the three and nine months ended September 30, 2016, respectively, compared to 9.7% and 9.9% for the three and nine months ended September 30, 2015, respectively. The increase in selling, general and administrative expenses was due to higher employee related costs such as incentive compensation and salaries, as well as certain non-income related taxes. Increased incentive compensation was principally due to higher projected annual operating results than in the same prior year period, which resulted in increased accruals for certain of our incentive compensation plans. The increase in salaries was attributable to an increase in headcount due to higher revenues than in the same prior year period, as well as cost of living adjustments and merit pay increases. Additionally, the increase in selling, general and administrative expenses for the nine months ended September 30, 2016 included $3.8 million of transaction costs associated with the acquisition of Ardent in April 2016, as well as increases in information technology costs and bad debt expense. The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2016 included $11.0 million and $20.9 million, respectively, of expenses directly related to companies acquired in 2016 and 2015, including amortization expense attributable to identifiable intangible assets of $1.2 million and $2.5 million, respectively. The decrease in SG&A margin for both periods was partially attributable to an increase in revenues without commensurate increases in our overhead cost structure.
Restructuring expenses
Restructuring expenses, primarily relating to employee severance obligations, were $0.5 million and $1.3 million for the three and nine months ended September 30, 2016, respectively, and $0.3 million and $0.7 million for the three and nine months ended September 30, 2015, respectively. As of September 30, 2016, the balance of these restructuring obligations yet to be paid was $0.5 million, the majority of which is expected to be paid during 2016. No material expenses in connection with restructuring from continuing operations are expected to be incurred during the remainder of 2016.
Operating income
The following tables present our operating income (loss) and operating income (loss) as a percentage of segment revenues from unrelated entities (in thousands, except for percentages):
|
| | | | | | | | | | | | | |
| For the three months ended September 30, |
| 2016 | | % of Segment Revenues | | 2015 | | % of Segment Revenues |
Operating income (loss): | | | | | | | |
United States electrical construction and facilities services | $ | 30,927 |
| | 6.7 | % | | $ | 25,528 |
| | 7.4 | % |
United States mechanical construction and facilities services | 39,447 |
| | 5.7 | % | | 26,926 |
| | 4.6 | % |
United States building services | 22,568 |
| | 5.0 | % | | 16,027 |
| | 3.7 | % |
United States industrial services | 14,586 |
| | 6.1 | % | | 14,340 |
| | 5.9 | % |
Total United States operations | 107,528 |
| | 5.8 | % | | 82,821 |
| | 5.2 | % |
United Kingdom building services | 2,591 |
| | 3.5 | % | | 3,358 |
| | 3.5 | % |
Corporate administration | (23,516 | ) | | — |
| | (15,912 | ) | | — |
|
Restructuring expenses | (539 | ) | | — |
| | (301 | ) | | — |
|
Total worldwide operations | 86,064 |
| | 4.5 | % | | 69,966 |
| | 4.1 | % |
Other corporate items: | | | | | | | |
Interest expense | (3,479 | ) | | | | (2,226 | ) | | |
Interest income | 161 |
| | | | 157 |
| | |
Income from continuing operations before income taxes | $ | 82,746 |
| | | | $ | 67,897 |
| | |
|
| | | | | | | | | | | | | |
| For the nine months ended September 30, |
| 2016 | | % of Segment Revenues | | 2015 | | % of Segment Revenues |
Operating income (loss): | | | | | | | |
United States electrical construction and facilities services | $ | 70,645 |
| | 5.8 | % | | $ | 67,479 |
| | 6.7 | % |
United States mechanical construction and facilities services | 101,504 |
| | 5.2 | % | | 80,191 |
| | 4.9 | % |
United States building services | 54,761 |
| | 4.0 | % | | 54,944 |
| | 4.2 | % |
United States industrial services | 66,600 |
| | 8.0 | % | | 44,588 |
| | 6.4 | % |
Total United States operations | 293,510 |
| | 5.5 | % | | 247,202 |
| | 5.3 | % |
United Kingdom building services | 9,160 |
| | 3.6 | % | | 8,570 |
| | 3.1 | % |
Corporate administration | (67,431 | ) | | — |
| | (52,031 | ) | | — |
|
Restructuring expenses | (1,271 | ) | | — |
| | (742 | ) | | — |
|
Total worldwide operations | 233,968 |
| | 4.2 | % | | 202,999 |
| | 4.1 | % |
Other corporate items: | | | | | | | |
Interest expense | (8,973 | ) | | | | (6,650 | ) | | |
Interest income | 518 |
| | | | 515 |
| | |
Income from continuing operations before income taxes | $ | 225,513 |
| | | | $ | 196,864 |
| | |
As described below in more detail, operating income was $86.1 million and $234.0 million for the three and nine months ended September 30, 2016, respectively, compared to $70.0 million and $203.0 million for the three and nine months ended September 30, 2015, respectively. Operating margin was 4.5% and 4.2% for the three and nine months ended September 30, 2016, respectively, compared to 4.1% for each of the three and nine months ended September 30, 2015.
Operating income of our United States electrical construction and facilities services segment for the three and nine months ended September 30, 2016 was $30.9 million and $70.6 million, respectively, compared to operating income of $25.5 million and $67.5 million for the three and nine months ended September 30, 2015, respectively. The increase in operating income for both periods was primarily attributable to the acquisition of Ardent, which contributed operating income of $5.7 million and $7.2 million, net of $0.7 million and $1.4 million of amortization expense associated with identifiable intangible assets, for the three and nine months ended September 30, 2016, respectively. Additionally, the increase in operating income for the three months ended September 30, 2016 was partially attributable to an increase in gross profit from commercial and manufacturing construction
contracts. Operating income was negatively impacted by $6.9 million and $17.4 million of losses incurred on a transportation construction project in the Northeastern United States as a result of productivity issues attributable to unfavorable job-site conditions for which we will seek recovery, resulting in a 1.4% and 1.3% negative impact on the segment’s operating margin for the three and nine months ended September 30, 2016, respectively. This project is expected to be completed by the end of 2016.
Our United States mechanical construction and facilities services segment operating income for the three months ended September 30, 2016 was $39.4 million, a $12.5 million increase compared to operating income of $26.9 million for the three months ended September 30, 2015. Operating income for the nine months ended September 30, 2016 was $101.5 million, a $21.3 million increase compared to operating income of $80.2 million for the nine months ended September 30, 2015. The increase in operating income for both periods was attributable to an increase in gross profit from commercial, manufacturing, healthcare and water and wastewater construction projects. Additionally, the results for the nine months ended September 30, 2016 included the receipt of $2.0 million from the former owner of a company we had previously acquired as a result of a settlement of a claim by us under the acquisition agreement. Companies acquired in 2015 generated operating income of $1.7 million and $3.0 million, net of $0.2 million and $0.6 million of amortization expense associated with identifiable intangible assets, for the three and nine months ended September 30, 2016, respectively. The increase in operating margin for the both periods was partially attributable to a decrease in the ratio of selling, general and administrative expenses to revenues.
Operating income of our United States building services segment for the three months ended September 30, 2016 increased by $6.5 million compared to operating income for the three months ended September 30, 2015, and its operating income for the nine months ended September 30, 2016 decreased by $0.2 million compared to the nine months ended September 30, 2015. The increase in operating income for the three months ended September 30, 2016 was attributable to an increase in gross profit from project, service and controls activities within our mobile mechanical services operations. Additionally, a company acquired during the second quarter of 2016, reported within our mobile mechanical services operations, generated operating income of $1.7 million and $2.6 million, net of $0.5 million and $0.9 million of amortization expense associated with identifiable intangible assets, for the three and nine months ended September 30, 2016. The decrease in operating income for the nine months ended September 30, 2016 was attributable to: (a) lower operating income within our commercial site-based services operations, partially as a result of a reduction in snow removal activities due to less snowfall in areas where our contracts are based on a per snow event basis, (b) a decrease in operating income within our government site-based services operations and (c) a decrease in operating income within our energy services operations, as a result of a loss incurred on a large project. In addition, operating income for the nine months ended September 30, 2015 included the impact of $2.7 million of gross profit recognized upon the favorable settlement of a claim by us against the former owner of a company we previously acquired. The increase in operating margin for the three months ended September 30, 2016 was attributable to an increase in gross profit margin.
Operating income of our United States industrial services segment for the three months ended September 30, 2016 increased by $0.2 million compared to operating income for the three months ended September 30, 2015, and its operating income for the nine months ended September 30, 2016 increased by $22.0 million compared to the nine months ended September 30, 2015. The increase in operating income for both periods was attributable to an increase in gross profit from specialty services offerings within our field services operations, including large project activity. In addition, this segment’s results for the first nine months of 2015 were negatively impacted by a nationwide strike by union employees of certain major oil refineries, which led to the loss and deferral of certain turnaround projects. The increase in operating income for both periods was partially offset by a decrease in gross profit from our shop services operations due to lower demand for new heat exchangers as a result of a curtailment in capital spending by most large integrated oil companies. The increase in operating margin for both periods was attributable to a decrease in the ratio of selling, general and administrative expenses to revenues.
Our United Kingdom building services segment operating income was $2.6 million and $9.2 million for the three and nine months ended September 30, 2016, respectively, compared to operating income of $3.4 million and $8.6 million for the three and nine months ended September 30, 2015, respectively. The decrease in operating income for the three months ended September 30, 2016 was primary attributable to a decrease of $0.5 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar and a decrease in project activity within the commercial market sector. The increase in operating income for the nine months ended September 30, 2016 was primarily attributable to an increase in gross profit from project activity within the commercial market, partially as a result of several contract awards won in 2015, offset in part by a decrease of $0.9 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The increase in operating margin for the nine months ended September 30, 2016 was attributable to an increase in gross profit margin.
Our corporate administration operating loss for the three months ended September 30, 2016 was $23.5 million compared to $15.9 million for the three months ended September 30, 2015. Our corporate administration operating loss for the nine months ended September 30, 2016 was $67.4 million compared to $52.0 million for the nine months ended September 30, 2015. The increase in expenses for both periods was primarily due to: (a) an increase in employment costs, such as incentive compensation, primarily due to higher projected annual operating results than in the same prior year period, (b) an increase in certain non-income
related taxes, (c) an increase in software licensing costs and (d) an increase in legal costs. Additionally, operating loss for the nine months ended September 30, 2016 increased as a result of $3.8 million of transaction costs associated with the acquisition of Ardent in April 2016.
Interest expense for the three months ended September 30, 2016 and 2015 was $3.5 million and $2.2 million, respectively. Interest expense for the nine months ended September 30, 2016 and 2015 was $9.0 million and $6.7 million, respectively. The increase in interest expense for both periods was primarily due to increased outstanding borrowings in 2016 compared to 2015. Interest income for each of the three months ended September 30, 2016 and 2015 was $0.2 million. Interest income for each of the nine months ended September 30, 2016 and 2015 was $0.5 million.
For the three months ended September 30, 2016 and 2015, our income tax provision from continuing operations was $30.8 million and $25.7 million, respectively, based on effective income tax rates, before discrete items and less amounts attributable to noncontrolling interests, of 38.1% and 38.0%, respectively. The actual income tax rates on income from continuing operations, less amounts attributable to noncontrolling interests, for the three months ended September 30, 2016 and 2015, inclusive of discrete items, were 37.2% and 38.1%, respectively. For the nine months ended September 30, 2016 and 2015, our income tax provision from continuing operations was $82.7 million and $74.7 million, respectively, based on effective income tax rates, before discrete items and less amounts attributable to noncontrolling interests, of 37.8% and 37.9%, respectively. The actual income tax rates on income from continuing operations, less amounts attributable to noncontrolling interests, for the nine months ended September 30, 2016 and 2015, inclusive of discrete items, were 36.7% and 38.0%, respectively. The increase in the 2016 income tax provision was primarily due to increased income from continuing operations. The decrease in the actual income tax rate on income from continuing operations for the three months ended September 30, 2016 was primarily due to the reversal of $0.8 million of reserves for uncertain income tax positions. The decrease in the actual income tax rate for the nine months ended September 30, 2016 was primarily due to $2.1 million of tax benefits recognized upon the issuance of common stock under share-based compensation plans.
Discontinued operations
Due to a historical pattern of losses 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, we announced during the quarter ended June 30, 2013 our decision to withdraw from the construction market in the United Kingdom. During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented in our Condensed Consolidated Financial Statements as discontinued operations.
Liquidity and Capital Resources
The following table presents our net cash provided by (used in) operating activities, investing activities and financing activities (in thousands):
|
| | | | | | | |
| For the nine months ended September 30, |
| 2016 | | 2015 |
Net cash provided by operating activities | $ | 128,924 |
| | $ | 95,581 |
|
Net cash used in investing activities | $ | (260,339 | ) | | $ | (22,298 | ) |
Net cash provided by (used in) financing activities | $ | 154,341 |
| | $ | (58,740 | ) |
Effect of exchange rate changes on cash and cash equivalents | $ | (5,199 | ) | | $ | (1,199 | ) |
Our consolidated cash balance increased by approximately $17.7 million from $486.8 million at December 31, 2015 to $504.6 million at September 30, 2016. Net cash provided by operating activities for the nine months ended September 30, 2016 was $128.9 million compared to net cash provided by operating activities of $95.6 million for the nine months ended September 30, 2015. The increase in cash provided by operating activities was primarily due to a $19.8 million increase in net income, a $19.6 million increase in net over-billings related to the timing of customer billings and payments and an $8.9 million decrease in our accounts receivable balances, partially offset by a $25.9 million increase in income taxes paid. Net cash used in investing activities was $260.3 million for the nine months ended September 30, 2016 compared to net cash used in investing activities of $22.3 million for the nine months ended September 30, 2015. The increase in net cash used in investing activities was primarily due to the increase in payments for acquisitions of businesses and property, plant and equipment. Net cash provided by financing activities for the nine months ended September 30, 2016 increased by approximately $213.1 million compared to the nine months ended September 30, 2015. The increase in net cash provided by financing activities was primarily due to borrowings of $220.0 million under our revolving credit facility and a decrease in distributions to noncontrolling interests, partially offset by an increase in funds used for the repurchase of common stock. Cash flows from discontinued operations were immaterial and are not expected to significantly affect future liquidity.
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 |
Revolving credit facility (including interest at 1.77%) (1) | | $ | 135.9 |
| | $ | 2.2 |
| | $ | 4.5 |
| | $ | 129.2 |
| | $ | — |
|
Term loan (including interest currently at 1.77%) (1) | | 430.8 |
| | 27.1 |
| | 53.0 |
| | 350.7 |
| | — |
|
Capital lease obligations | | 4.2 |
| | 1.2 |
| | 2.2 |
| | 0.8 |
| | — |
|
Operating leases | | 271.2 |
| | 61.5 |
| | 98.4 |
| | 60.8 |
| | 50.5 |
|
Open purchase obligations (2) | | 1,011.9 |
| | 786.2 |
| | 213.8 |
| | 11.9 |
| | — |
|
Other long-term obligations, including current portion (3) | | 386.4 |
| | 48.8 |
| | 327.5 |
| | 10.1 |
| | — |
|
Liabilities related to uncertain income tax positions (4) | | 4.4 |
| | 3.7 |
| | — |
| | — |
| | 0.7 |
|
Total Contractual Obligations | | $ | 2,244.8 |
| | $ | 930.7 |
| | $ | 699.4 |
| | $ | 563.5 |
| | $ | 51.2 |
|
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