10-QPeriod: Q2 FY2006

EMCOR Group, Inc. Quarterly Report for Q2 Ended Jun 30, 2006

Filed July 27, 2006For Securities:EME

Summary

EMCOR Group, Inc. reported strong financial results for the second quarter and first half of 2006, demonstrating significant growth and improved profitability compared to the prior year. Total revenues increased by 4.4% for the quarter and 5.3% for the six-month period, driven by higher-margin project work, particularly in US facilities services and international operations. Profitability saw substantial gains, with net income more than doubling in the second quarter and increasing significantly in the first half of the year. This improvement is attributed to better performance on US mechanical and Canadian construction contracts, a higher mix of profitable projects, and the absence of certain prior-year expenses. Diluted EPS also saw a marked increase. The company's backlog also grew, indicating continued demand for its services, especially in commercial construction projects.

Key Highlights

  • 1Revenues increased to $1.22 billion for Q2 2006 and $2.37 billion for the first six months of 2006, up from $1.17 billion and $2.25 billion in the respective prior-year periods.
  • 2Net income surged to $16.9 million ($0.52 diluted EPS) for Q2 2006 and $23.9 million ($0.73 diluted EPS) for the first six months of 2006, a significant improvement from $7.9 million ($0.25 diluted EPS) and $9.8 million ($0.31 diluted EPS) respectively in the prior year.
  • 3Gross profit margin improved to 10.9% in Q2 2006 and 10.5% for the first six months, up from 9.6% and 9.4% in the comparable periods of 2005, reflecting better project performance and a higher mix of profitable work.
  • 4Selling, general, and administrative expenses increased, largely due to higher incentive-based compensation and the adoption of new accounting standards for share-based payments (FASB 123(R)).
  • 5The company's contract backlog grew to $3.22 billion at June 30, 2006, up from $2.72 billion a year prior, indicating robust future revenue potential.
  • 6Operating income increased significantly, driven by strong performance in US mechanical construction, US facilities services, and improved results in Canada and the UK, despite a decrease in operating income for US electrical construction.
  • 7Cash and cash equivalents increased substantially to $180.9 million at June 30, 2006, from $103.8 million at December 31, 2005, supported by strong operating cash flows.

Frequently Asked Questions

EMCOR's improved profitability was driven by several factors, including generally better performance and increased gross profit on US mechanical construction and Canadian construction contracts, an increased availability of higher gross margin work in the United States, and the absence of significant one-time expenses that impacted the prior year's results. Specifically, the prior year had a $8.7 million non-cash expense related to a civil action and a $5.6 million favorable insurance settlement in Q1 2005 which skewed prior year results.

EMCOR adopted FASB Statement 123(R) on January 1, 2006. This resulted in the recognition of share-based payments at fair value, leading to increased compensation expenses of $2.3 million and $2.9 million in the three and six-month periods ended June 30, 2006, respectively. This adversely impacted net income by $1.3 million and $1.7 million, and diluted EPS by $0.04 and $0.05 for these periods.

EMCOR's contract backlog stood at $3.22 billion at June 30, 2006, a notable increase from $2.72 billion at June 30, 2005. This growth, primarily in US operations, is attributed to increased availability of commercial construction projects, signaling positive future revenue potential.

EMCOR's liquidity position has strengthened significantly, with cash and cash equivalents increasing to $180.9 million at June 30, 2006, from $103.8 million at December 31, 2005. The primary source of liquidity remains cash generated from operating activities. The company also maintains a $375 million revolving credit facility, which had no outstanding borrowings as of June 30, 2006.