10-QPeriod: Q1 FY2005

EMCOR Group, Inc. Quarterly Report for Q1 Ended Mar 31, 2005

Filed April 28, 2005For Securities:EME

Summary

EMCOR Group, Inc. reported mixed financial results for the first quarter of 2005 compared to the same period in 2004. While revenues saw a slight decrease to $1.09 billion from $1.11 billion, the company improved its operating income significantly, turning a loss of $4.5 million into a profit of $5.5 million. This improvement was driven by strategic cost reductions, including a decrease in selling, general, and administrative expenses, and favorable contract performance, partially offset by a significant non-cash expense related to a civil action concerning the UOSA project. Net income for the quarter was $1.9 million, a decrease from $5.7 million in the prior year, largely due to a substantial income tax benefit recorded in the first quarter of 2004. Basic and diluted EPS were $0.12 and $0.12 respectively, down from $0.38 and $0.37 in Q1 2004. Despite the decline in net income, the company's efforts to control expenses and improve operational efficiency are evident in the improved operating income and reduced SG&A. Investors should monitor the outcome of the UOSA legal proceedings and the company's strategy to focus on multi-year facilities services contracts.

Key Highlights

  • 1Revenues decreased slightly by 1.4% to $1.09 billion in Q1 2005 from $1.11 billion in Q1 2004.
  • 2Operating income improved significantly, swinging from a loss of $4.5 million in Q1 2004 to a profit of $5.5 million in Q1 2005.
  • 3Net income declined to $1.9 million in Q1 2005 from $5.7 million in Q1 2004, primarily due to a large income tax benefit in the prior year.
  • 4Selling, general, and administrative (SG&A) expenses decreased by 7.2% to $93.4 million, reflecting cost-reduction efforts.
  • 5A significant non-cash expense of $8.7 million was recorded related to the UOSA civil action, impacting gross profit and operating income.
  • 6EMCOR's backlog stood at $2.72 billion at the end of Q1 2005, down from $3.08 billion in the prior year, partly due to a planned curtailment in bidding for certain contracts.
  • 7The company maintained a strong liquidity position, with cash and cash equivalents of $69.3 million at the end of Q1 2005 and a $350 million revolving credit facility.

Frequently Asked Questions

The primary driver for the decrease in net income from $5.7 million in Q1 2004 to $1.9 million in Q1 2005 was a significant income tax benefit of $12.4 million recorded in the first quarter of 2004. This benefit was related to the reversal of income tax reserves that were no longer required. Without this one-time benefit in the prior year, the net income comparison would be more favorable.

The UOSA Action involves a civil lawsuit brought by a joint venture of which EMCOR's subsidiary Poole & Kent is a part, against the Upper Occoquan Sewage Authority. While a jury decision in March 2005 ruled in favor of the JV, entitling them to additional payments, EMCOR recorded a non-cash expense of $8.7 million. This expense represents a write-off of unrecovered costs related to a sub-contract, based on EMCOR's estimate of probable recovery. The outcome of post-trial motions and potential further claims could still impact EMCOR's future financial results.

EMCOR has implemented significant cost reduction actions, which are reflected in the decrease in selling, general, and administrative (SG&A) expenses. SG&A decreased by $7.1 million to $93.4 million in Q1 2005 compared to the prior year, representing 8.5% of revenues versus 9.1% in Q1 2004. This reduction was primarily due to personnel changes and other cost-saving initiatives. Management plans to continue focusing on controlling SG&A expenses throughout 2005.

EMCOR maintains a solid liquidity position with $69.3 million in cash and cash equivalents at the end of Q1 2005. The company also has a $350 million revolving credit facility, of which $82.4 million was borrowed at the end of the quarter. EMCOR's primary source of liquidity is expected to be cash generated from operations, supplemented by its credit facility and potential future debt or equity offerings. The company's strategy to focus on stable, multi-year facilities services contracts is intended to provide a more predictable cash flow stream.