10-QPeriod: Q1 FY2002

EMCOR Group, Inc. Quarterly Report for Q1 Ended Mar 31, 2002

Filed April 30, 2002For Securities:EME

Summary

EMCOR Group, Inc. reported its first quarter 2002 results, showing a slight decrease in revenue to $810.3 million compared to $837.6 million in the prior year's first quarter. However, net income saw a notable increase to $7.3 million from $5.7 million in Q1 2001, translating to diluted earnings per share (EPS) of $0.47, up from $0.44 in the prior year. This improvement was largely driven by a significant acquisition of nineteen subsidiaries from Comfort Systems USA, Inc. on March 1, 2002, which contributed approximately one month of revenue and improved gross profit margins. The acquisition, valued at $186.25 million, significantly increased EMCOR's goodwill on the balance sheet to $169.6 million from $56.0 million. While the acquisition boosted revenues in the mechanical construction segment, the overall revenue decline was due to a reduction in fast-track jobs and a planned decrease in work in certain markets. Despite revenue headwinds, the company demonstrated improved operational efficiency, with gross profit margin increasing to 11.0% from 9.6%. Investors should note the impact of new accounting standards, particularly SFAS 142 regarding goodwill, which will change how goodwill is treated moving forward.

Key Highlights

  • 1Revenue for Q1 2002 was $810.3 million, a decrease of $27.3 million from $837.6 million in Q1 2001, primarily due to a reduction in fast-track jobs and planned work decreases.
  • 2Net income increased to $7.3 million in Q1 2002 from $5.7 million in Q1 2001.
  • 3Diluted EPS improved to $0.47 in Q1 2002, up from $0.44 in Q1 2001.
  • 4EMCOR completed a significant acquisition of nineteen subsidiaries from Comfort Systems USA, Inc. on March 1, 2002, for $186.25 million, which contributed $48.8 million in revenue for the month of March.
  • 5Goodwill on the balance sheet increased significantly from $56.0 million at year-end 2001 to $169.6 million at March 31, 2002, primarily due to the Comfort Systems acquisition.
  • 6Gross profit margin improved to 11.0% in Q1 2002 from 9.6% in Q1 2001, boosted by the acquired companies and improved contract performance.
  • 7The company's backlog stood at $2.5 billion at the end of Q1 2002, up from $2.4 billion at year-end 2001 and $2.0 billion in the prior year's first quarter, reflecting the impact of the acquisition.

Frequently Asked Questions

The primary driver of the increase in net income was the acquisition of nineteen subsidiaries from Comfort Systems USA, Inc. on March 1, 2002. These acquired companies contributed positively to gross profit margins, and the company also benefited from improved operational efficiency and a shift in contract types, leading to a higher gross profit percentage and overall net income improvement.

The acquisition significantly impacted EMCOR's financial statements. It added $48.8 million in revenue for March 2002, increased goodwill on the balance sheet substantially to $169.6 million, and contributed to higher operating income in the mechanical construction segment. The company also incurred $5.7 million in selling, general, and administrative expenses related to the acquisition and assumed $22.1 million in notes payable.

Under SFAS 142, goodwill is no longer amortized over time. Instead, it will be tested for impairment annually (or more frequently if indicators exist) and written down if its carrying value exceeds its fair value. This change will impact how goodwill is accounted for on the income statement, removing amortization expenses that were present in prior periods (e.g., $1.3 million in Q1 2001). EMCOR is still evaluating the full impact of this standard.

EMCOR's cash and cash equivalents decreased to $142.5 million from $189.8 million at year-end 2001. However, the company generated $53.5 million in cash from operations in Q1 2002, a significant increase from the prior year. They also have $150 million in borrowing capacity under their revolving credit facility, with $50 million drawn as of March 31, 2002. Management believes these resources, combined with expected operating cash flow, are sufficient for near-term and foreseeable long-term liquidity needs.