EMCOR GROUP, INC. Business Description We are one of the largest electrical and mechanical construction and facilities services firms inthe 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 85 operating subsidiaries and joint venture entities. Our offices are located inthe United States and theUnited Kingdom . We have the following reportable segments: (a)United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; premises electrical and lighting systems; process instrumentation in the refining, chemical processing, food processing, and mining industries; 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 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 mechanical maintenance and services, including maintenance and service of mechanical, electrical, plumbing, and building automation systems; 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 "United States industrial services" segment principally consists of those operations which provide industrial maintenance and services for refineries, petrochemical plants, and other customers within the oil and gas industry. Services of this segment include refinery turnaround planning and engineering; specialty welding; overhaul and maintenance of critical process units; specialty technical services; on-site repairs, maintenance and service of heat exchangers, towers, vessels, and piping; and design, manufacturing, repair, and hydro blast cleaning of shell and tube heat exchangers and related equipment. COVID-19 and Market Update InDecember 2019 , a novel strain of coronavirus ("COVID-19") emerged and has spread around the world. OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 to be a global pandemic. In response, government authorities in theU.S. andU.K. imposed various social distancing, quarantine, and isolation measures on large portions of the population. As a result of the pandemic, as well as the related containment and mitigation measures, we have experienced disruptions that have impacted our ability to execute on our remaining performance obligations in many of the markets in which we operate. Such impacts include, but are not limited to, access restrictions and temporary job site shutdowns, reduced labor efficiency resulting from the adherence to physical distancing and other enhanced safety protocols mandated at the majority of our worksite locations, and the deferral of maintenance and service projects by our customers. Although we have not experienced significant project cancellations, and we continue to actively quote new work for our customers, as evidenced by the 12% increase in our remaining performance obligations sinceDecember 31, 2019 , we are experiencing delays in certain projects and a reduction in the number of call-out service and repair opportunities. Additionally, the demand for oil has significantly deteriorated as a result of the pandemic and the corresponding preventative measures taken around the world to mitigate the spread of the virus, including travel restrictions imposed by various local, state, and other governmental authorities. Further, other macroeconomic events, such as geopolitical tensions between theOrganization of Petroleum Exporting Countries ("OPEC") andRussia , have resulted in significant volatility in the price of crude oil. These factors have created significant uncertainty in the markets in which ourUnited States industrial services segment operates. As a result, many customers have responded by reducing capital spending, implementing various cost cutting measures, and closing certain of their facilities. Such customer actions have resulted in a significant decrease in the demand for our service offerings within such segment. While we continued to experience stabilization during the third quarter of 2020 within ourUnited States construction segments and ourUnited States andUnited Kingdom building services segments as many shelter-in-place orders were lifted, various other containment and mitigation measures were eased, and our teams and customers further adapted to this new work environment, this positive trend may not continue. The extent to which the COVID-19 pandemic will impact our business and results of operations in future periods remains highly uncertain and will be affected by a number of factors. These include the 29 -------------------------------------------------------------------------------- Table of Contents duration and extent of the pandemic; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to quarantine; whether there is a significant resumption of shelter-in-place orders; the near-term impact of the pandemic on broader economic activity, including on construction projects and the oil and gas and related industrial markets; our customers' demand for our services; our ability to effectively operate in this environment; the ability of our customers to pay us for services rendered; and any prolonged delays or shutdowns of active projects or closures of our and our customers' offices and facilities. To date, we have been able to source the supplies and materials needed to operate our business with minimal disruptions. However, the impact of the COVID-19 pandemic on our vendors continues to evolve and may make it difficult to obtain such materials in future periods. While we believe our remaining performance obligations are firm, customers may also slow down decision-making, delay planned work or seek to terminate existing agreements. Any of these events could have a material adverse effect on our business, financial condition, and/or results of operations. Overview The following table presents selected financial data for the three months endedSeptember 30, 2020 and 2019 (in thousands, except percentages and per share data): For the three months ended September 30, 2020 2019 Revenues$ 2,201,714 $ 2,287,741
Revenues (decrease) increase from prior year (3.8) % 11.8 %
Gross profit $ 363,184 $ 335,987
Gross profit as a percentage of revenues 16.5 % 14.7 %
Operating income $ 135,855 $ 115,749
Operating income as a percentage of revenues 6.2 % 5.1 %
Net income $ 61,186 $ 81,834
Diluted earnings per common share $ 1.11 $ 1.45
Revenues for the third quarter of 2020 were$2.20 billion , a decrease of$86.0 million , or 3.8%, compared to revenues of$2.29 billion for the third quarter of 2019. As discussed in further detail below, such decrease in revenues was primarily attributable to revenue declines within ourUnited States industrial services segment and ourUnited States electrical construction and facilities services segment, largely as a result of a decrease in demand for our service offerings within the oil and gas and related industrial markets given the aforementioned negative macroeconomic conditions impacting these markets. These revenue declines were partially offset by revenue growth within ourUnited States mechanical construction and facilities services segment and ourUnited States building services segment, inclusive of the impact of businesses acquired, as discussed below, as well as an increase in revenues of ourUnited Kingdom building services segment. Operating income for the three months endedSeptember 30, 2020 increased by$20.1 million to$135.9 million compared to operating income of$115.7 million for the three months endedSeptember 30, 2019 . Despite the decline in revenues during the third quarter of 2020, our results set new company records in terms of quarterly operating income. In addition, operating margin of 6.2%, which represents a 110 basis point improvement over operating margin of 5.1% in the prior year period, set a new company record for a third quarter. This improved year-over-year operating performance was primarily driven by an increase in gross profit and gross profit margin within ourUnited States construction segments. These improvements were partially offset by a significant reduction in operating income of ourUnited States industrial services segment as a result of the previously referenced market conditions within the oil and gas and related industrial markets. Net income of$61.2 million , or$1.11 per diluted share, for the quarter endedSeptember 30, 2020 compares unfavorably to net income of$81.8 million , or$1.45 per diluted share, for the quarter endedSeptember 30, 2019 . The decline in both net income and diluted earnings per common share are a result of the tax effects of the$232.8 million non-cash goodwill, identifiable intangible asset, and other long-lived asset impairment charges recorded during the second quarter of 2020, the majority of which is non-deductible for tax purposes. 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 byEMCOR in the comparable prior reported period. 30 -------------------------------------------------------------------------------- Table of Contents We acquired two companies during the first nine months of 2020. One company provides building automation and controls solutions within the Northeastern region ofthe United States , and the other company is a full service provider of mechanical services within theWashington, D.C. metro area. The results of operations for both companies have been included within ourUnited States building services segment. OnNovember 1, 2019 , we completed the acquisition ofBatchelor & Kimball, Inc. ("BKI"), a leading full service provider of mechanical construction and maintenance services. This acquisition strengthens our position and broadens our capabilities in the Southern and Southeastern regions ofthe United States , and the results of its operations have been included within ourUnited States mechanical construction and facilities services segment. In addition to BKI, during calendar year 2019, we acquired: (a) a company which provides electrical contracting services in centralIowa , the results of operations of which have been included within ourUnited States electrical construction and facilities services segment, (b) a company which provides mechanical contracting services in south-central and easternTexas , the results of operations of which have been included within ourUnited States mechanical construction and facilities services segment, and (c) four companies included within ourUnited States building services segment, consisting of: (i) a company which provides mobile mechanical services in the Southern region ofthe United States and (ii) three companies, the results of operations of which were de minimis, which bolster our presence in geographies where we have existing operations and provide either mobile mechanical services or building automation and controls solutions. Companies acquired in 2020 and 2019 generated incremental revenues of$81.4 million and incremental operating income of$5.5 million , inclusive of$4.9 million of amortization expense associated with identifiable intangible assets, for the three months endedSeptember 30, 2020 . Results of Operations Revenues The following tables present our operating segment revenues from unrelated entities and their respective percentages of total revenues (in thousands, except for percentages):
For the three months ended
% of % of
2020 Total 2019 Total
Revenues:$ 508,863 23 %$ 554,637 24 %
891,509 41 % 869,188 38 %
United States building services 551,555 25 % 532,122 23 %
United States industrial services 139,712 6 % 234,166 10 %
Total United States operations 2,091,639 95 % 2,190,113 96 %
United Kingdom building services 110,075 5 % 97,628 4 %
Total worldwide operations $ 2,201,714 100 % $ 2,287,741 100 %
For the nine months ended
% of % of
2020 Total 2019 Total
Revenues:$ 1,479,973 23 %$ 1,652,109 24 %
2,516,062 38 % 2,444,683 36 %
United States building services 1,542,054 24 % 1,567,899 23 %
United States industrial services 661,909 10 % 788,271 12 %
Total United States operations 6,199,998 95 % 6,452,962 95 %
United Kingdom building services 315,569 5 % 317,709 5 %
Total worldwide operations $ 6,515,567 100 % $ 6,770,671 100 %
31-------------------------------------------------------------------------------- Table of Contents As described below in more detail, our revenues for the three months endedSeptember 30, 2020 decreased to$2.20 billion compared to$2.29 billion for the three months endedSeptember 30, 2019 , and our revenues for the nine months endedSeptember 30, 2020 decreased to$6.52 billion compared to$6.77 billion for the nine months endedSeptember 30, 2019 . The decrease in revenues for the three month period was attributable to decreased revenues from ourUnited States industrial services segment and ourUnited States electrical construction and facilities services segment. The decrease in revenues for the nine month period was attributable to decreased revenues from all of our reportable segments, except for ourUnited States mechanical construction and facilities services segment. Companies acquired in 2020 and 2019, which are reported in ourUnited States electrical construction and facilities services segment, ourUnited States mechanical construction and facilities services segment, and ourUnited States building services segment, generated incremental revenues of$81.4 million and$214.1 million for the three and nine months endedSeptember 30, 2020 , respectively. Revenues of ourUnited States electrical construction and facilities services segment were$508.9 million and$1,480.0 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to revenues of$554.6 million and$1,652.1 million for the three and nine months endedSeptember 30, 2019 , respectively. The decrease in revenues for both the three and nine months endedSeptember 30, 2020 was predominantly attributable to: (a) a reduction in industrial project activities within the manufacturing market sector due to adverse market conditions within the oil and gas industry, as previously referenced, (b) a decline in revenues from construction projects within the commercial and healthcare market sectors, as a result of the completion or substantial completion of certain projects, and (c) the effects of the COVID-19 pandemic on our operations, which resulted in: (i) a decrease in the number of short duration projects and (ii) project delays or access restrictions resulting from the various containment and mitigation measures mandated by certain of our customers and/or governmental authorities. The decrease in revenues for the nine months endedSeptember 30, 2020 was also due to reduced project activity within the water and wastewater and transportation market sectors. These decreases were partially offset by increased revenues from construction projects within the institutional and hospitality market sectors during both the three and nine months endedSeptember 30, 2020 and the transportation market sector during the three months endedSeptember 30, 2020 . The results for the nine months endedSeptember 30, 2020 included$25.4 million of incremental revenues generated by a company acquired in 2019. OurUnited States mechanical construction and facilities services segment revenues for the three months endedSeptember 30, 2020 were$891.5 million , a$22.3 million increase compared to revenues of$869.2 million for the three months endedSeptember 30, 2019 . Revenues of this segment for the nine months endedSeptember 30, 2020 were$2,516.1 million , a$71.4 million increase compared to revenues of$2,444.7 million for the nine months endedSeptember 30, 2019 . For the three and nine months endedSeptember 30, 2020 , the results of this segment included$61.1 million and$164.6 million , respectively, of incremental revenues generated by companies acquired in 2019. Excluding the impact of acquisitions, revenues of this segment decreased by$38.8 million and$93.2 million for the three and nine month periods, respectively, primarily as a result of a decline in revenues from: (a) the manufacturing market sector, inclusive of certain large food processing construction projects, (b) several telecommunications and technology projects within the commercial market sector, and (c) the healthcare market sector, due to the completion or substantial completion of certain projects. Similar to ourUnited States electrical construction and facilities services segment, revenues of this segment for the three and nine months endedSeptember 30, 2020 were negatively impacted by the effects of the COVID-19 pandemic, which resulted in project delays and temporary job site shutdowns, as well as a decrease in the number of short duration projects. The revenue reductions for both periods were partially offset by increased revenues from the majority of the remaining market sectors in which we operate. For the three months endedSeptember 30, 2020 , revenues of ourUnited States building services segment were$551.6 million compared to revenues of$532.1 million for the three months endedSeptember 30, 2019 . The increase in revenues for such period was a result of$20.3 million of incremental revenues generated by businesses acquired in 2020. Excluding such incremental revenues, this segment's revenues declined marginally during the quarter. Revenue reductions within our mobile mechanical services operations were largely offset by revenue growth within our commercial site-based services and government services operations. Revenues of this segment for the nine months endedSeptember 30, 2020 were$1,542.1 million compared to revenues of$1,567.9 million for the nine months endedSeptember 30, 2019 . Excluding acquisition revenues of$24.1 million , this segment's revenues decreased by approximately$50.0 million during the nine months endedSeptember 30, 2020 . Such reduction in revenues was primarily attributable to: (a) decreased project and controls activities within our mobile mechanical services operations, largely as a result of the impact of the COVID-19 pandemic, which resulted in fewer project opportunities given the temporary closure of certain customer facilities, (b) decreased large project activity within our energy services operations, primarily as a result of the completion of certain projects which were active in the prior year, and (c) the loss of certain contracts not renewed pursuant to rebid, which resulted in a reduction to both base maintenance and indefinite-delivery, indefinite-quantity project revenues within our government services business. These revenue declines were partially offset by increased customer demand for certain services aimed at improving the indoor air quality within their facilities. 32 -------------------------------------------------------------------------------- Table of Contents Revenues of ourUnited States industrial services segment for the three months endedSeptember 30, 2020 were$139.7 million , a$94.5 million decrease compared to revenues of$234.2 million for the three months endedSeptember 30, 2019 . Revenues for the nine months endedSeptember 30, 2020 were$661.9 million , a$126.4 million decrease compared to revenues of$788.3 million for the nine months endedSeptember 30, 2019 . Revenues of this segment for both the three and nine month periods were negatively impacted by adverse market conditions including unprecedented volatility in the price of crude oil, initially as a result of a decline in demand caused by the COVID-19 pandemic and further driven by the dislocation between supply and demand resulting from a breakup in dialogue betweenOPEC andRussia over a proposed curtailment in the production of oil. Such macroeconomic conditions led to a decrease in demand for our services, which resulted in: (a) a decrease in maintenance and capital project activity within our field services operations and (b) a reduction in new build heat exchanger sales and a decrease in maintenance, repair, and hydro blast cleaning services within our shop services operations. In addition, revenues for the quarter endedSeptember 30, 2020 were negatively impacted by project stoppages resulting from hurricanes, including certain named storms, within theGulf Coast region. OurUnited Kingdom building services segment revenues were$110.1 million for the three months endedSeptember 30, 2020 compared to revenues of$97.6 million for the three months endedSeptember 30, 2019 . The increase in revenues within this segment for such period was primarily attributable to: (a) an increase in revenues from new maintenance contract awards within the commercial market sector, and (b) increased project activity with existing customers, primarily within the water and wastewater market sector. In addition, this segment's revenues for the quarter endedSeptember 30, 2020 were positively impacted by$5.0 million related to the effect of favorable exchange rates for the British pound versusthe United States dollar. For the nine months endedSeptember 30, 2020 , revenues of this segment were$315.6 million compared to revenues of$317.7 million for the nine months endedSeptember 30, 2019 . The slight decrease in revenues within this segment for the nine month period was despite reduced opportunities for project work brought upon by the temporary closure of certain customer facilities and the temporary suspension of capital spending as a result of the COVID-19 pandemic in the first half of 2020. Unfavorable exchange rates for the British pound versusthe United States dollar negatively impacted this segment's revenues for the nine months endedSeptember 30, 2020 by$0.6 million . Cost of sales and Gross profit The following table presents our cost of sales, gross profit (revenues less cost of sales) and gross profit margin (gross profit as a percentage of revenues) (in thousands, except for percentages): For the nine For the three months ended months ended September 30, September 30, 2020 2019 2020 2019 Cost of sales$ 1,838,530 $ 1,951,754 $ 5,504,036 $ 5,779,550 Gross profit$ 363,184 $
335,987
16.5 % 14.7 % 15.5 % 14.6 %
Our gross profit increased by $27.2 million for the three months ended September
30, 2020 compared to the three months ended September 30, 2019 . Gross profit
increased by $20.4 million for the nine months ended September 30, 2020 compared
to the nine months ended September 30, 2019 . Our gross profit margin was 16.5%
and 15.5% for the three and nine months ended September 30, 2020 , respectively,
compared to gross profit margin of 14.7% and 14.6% for the three and nine months
ended September 30, 2019 , respectively. The increase in gross profit for the
three month period was a result of an increase in gross profit from all of our
reportable segments, except for our United States industrial segment, which
continues to be impacted by negative macroeconomic conditions and prolonged
uncertainty in the markets in which it operates. The increase in gross profit
for the nine month period was a result of an increase in gross profit from our
United States mechanical construction and facilities services segment and our
United Kingdom building services segment. The increase in gross profit margin
for both periods was primarily attributable to improved operating performance
within both of our United States construction segments, as described in further
detail below.
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 nine
For the three months ended months ended
September 30, September 30,
2020 2019 2020 2019
Selling, general and administrative expenses
$ 220,119 $ 658,964 $ 652,536 Selling, general and administrative expenses, as a percentage of revenues 10.3 % 9.6 % 10.1 % 9.6 % 33
-------------------------------------------------------------------------------- Table of Contents Our selling, general and administrative expenses for the three months endedSeptember 30, 2020 were$226.8 million compared to selling, general and administrative expenses of$220.1 million for the three months endedSeptember 30, 2019 . Selling, general and administrative expenses for the nine months endedSeptember 30, 2020 were$659.0 million compared to selling general and administrative expenses of$652.5 million for the nine months endedSeptember 30, 2019 . For the three and nine months endedSeptember 30, 2020 , selling, general and administrative expenses included$8.9 million and$25.2 million , respectively, of incremental expenses directly related to companies acquired in 2020 and 2019, including amortization expense attributable to identifiable intangible assets of$2.8 million and$8.2 million , respectively. Excluding incremental expenses from businesses acquired, our selling, general and administrative expenses decreased by$2.2 million and$18.7 million for the three and nine month periods, respectively, primarily as a result of certain cost reductions resulting from, or actions taken in response to, the COVID-19 pandemic, including: (a) a reduction in certain discretionary spending, such as travel and entertainment costs, (b) a decrease in salaries expense due to: (i) a reduction in headcount, resulting from lower revenues than in the same prior year period, and (ii) certain short-term cost cutting measures, including temporary furloughs and salary reductions, and (c) a decrease in employee benefit costs, partially due to a decline in medical claims. While our incentive compensation expense for the nine months endedSeptember 30, 2020 remains relatively consistent with that of the nine months endedSeptember 30, 2019 , we did experience an increase in incentive compensation expense for the three months endedSeptember 30, 2020 , primarily within both of ourUnited States construction segments, as a result of the improved operating performance during the period and our revised expectations for annual operating results. Selling, general and administrative expenses as a percentage of revenues were 10.3% and 9.6% for the three months endedSeptember 30, 2020 and 2019, respectively, compared to 10.1% and 9.6% for the nine months endedSeptember 30, 2020 and 2019, respectively. The increase in SG&A margin for both the three and nine month periods was a result of a reduction in revenues without a commensurate decrease in certain of our overhead costs, including certain fixed costs within ourUnited States industrial services segment, despite the significant revenue decline within such segment. Impairment loss on goodwill, identifiable intangible assets, and other long-lived assets During the second quarter of 2020, we identified certain indicators of impairment resulting from the aforementioned uncertainties caused by the COVID-19 pandemic and the significant volatility in the price of crude oil. These uncertainties have resulted in lower forecasted revenue and operating margin expectations for those of our businesses that are highly dependent on the strength of the oil and gas and related industrial markets, resulting in the recognition of a$232.8 million impairment charge in the prior quarter. Of this amount,$230.3 million related to ourUnited States industrial services segment and was comprised of: (a)$225.5 million related to goodwill, (b)$4.2 million associated with a subsidiary trade name, and (c)$0.6 million related to certain long-lived assets. The remaining$2.5 million represented a subsidiary trade name impairment within ourUnited States electrical construction and facilities services segment. No impairment was recognized during the three months endedSeptember 30, 2020 . Operating income (loss) The following tables present our operating income (loss) and operating margin (operating income (loss) as a percentage of segment revenues) from unrelated entities (in thousands, except for percentages):
For the three months ended
% of % of
Segment Segment
2020 Revenues 2019 Revenues
Operating income (loss):
$ 47,059 9.2 %$ 33,630 6.1 %
80,048 9.0 % 61,213 7.0 %
United States building services 38,205 6.9 % 35,051 6.6 %
United States industrial services (9,794) (7.0) % 5,561 2.4 %
Total United States operations 155,518 7.4 % 135,455 6.2 %
United Kingdom building services 5,327 4.8 % 4,754 4.9 %
Corporate administration (24,454) - (24,341) -
Restructuring expenses (536) - (119) -
Total worldwide operations 135,855 6.2 % 115,749 5.1 %
Other corporate items:
Net periodic pension (cost) income 751 381
Interest expense, net (1,484) (2,678)
Income before income taxes $ 135,122 $ 113,452
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Table of Contents
For the nine months ended
% of % of
Segment Segment
2020 Revenues 2019 Revenues
Operating income (loss):
$ 123,146 8.3 %$ 120,380 7.3 %
192,156 7.6 % 156,152 6.4 %
United States building services 85,421 5.5 % 90,535 5.8 %
United States industrial services 5,424 0.8 % 31,209 4.0 %
Total United States operations 406,147 6.6 % 398,276 6.2 %
United Kingdom building services 16,442 5.2 % 14,371 4.5 %
Corporate administration (70,022) - (74,062) -
Restructuring expenses (605) - (567) -
Impairment loss on goodwill, identifiable intangible assets, and other long-lived assets
(232,750) - - -
Total worldwide operations 119,212 1.8 % 338,018 5.0 %
Other corporate items:
Net periodic pension (cost) income 2,211 1,187
Interest expense, net (6,082) (8,732)
Income before income taxes $ 115,341 $ 330,473
As described below in more detail, operating income was $135.9 million , or 6.2%
of revenues, for the three months ended September 30, 2020 , compared to
operating income of $115.7 million , or 5.1% of revenues, for the three months
ended September 30, 2019 . Operating income for the nine months ended September
30, 2020 was $119.2 million , or 1.8% of revenues, compared to $338.0 million , or
5.0% of revenues, for the nine months ended September 30, 2019 . The increase in
operating income and operating margin for the three month period was
predominately a result of improved gross profit and gross profit margin within
both of our United States construction segments. For the nine months ended
September 30, 2020 , our operating results included $232.8 million of non-cash
impairment charges recorded during the second quarter, which negatively impacted
the Company's operating margin by approximately 360 basis points for the
year-to-date period. Excluding the impact of such impairments, operating income
and operating margin for the nine months ended September 30, 2020 increased by
$13.9 million and 40 basis points. Companies acquired in 2020 and 2019, 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 operating income of $5.5 million and $10.7 million , inclusive of
$4.9 million and $13.0 million of amortization expense associated with
identifiable intangible assets, for the three and nine months ended September
30, 2020 , respectively.
Operating income of our United States electrical construction and facilities
services segment for the three months ended September 30, 2020 was $47.1
million , or 9.2% of revenues, compared to operating income of $33.6 million , or
6.1% of revenues, for the three months ended September 30, 2019 . Operating
income of this segment for the nine months ended September 30, 2020 was $123.1
million , or 8.3% of revenues, compared to operating income of $120.4 million , or
7.3% of revenues, for the nine months ended September 30, 2019 . A company
acquired in 2019 contributed incremental operating income of $1.6 million ,
inclusive of $0.1 million of amortization expense associated with identifiable
intangible assets, during the nine months ended September 30, 2020 . The increase
in operating income and operating margin for both 2020 periods was due to an
increase in gross profit from construction projects, despite the impact of the
COVID-19 pandemic on our operations. For the three and nine months ended
September 30, 2020 , this segment experienced an increase in gross profit from
project activities within: (a) the commercial market sector, largely driven by
several telecommunication construction projects, (b) the transportation and
institutional market sectors, partially as a result of favorable settlement of
final contract value on certain projects, which resulted in incremental gross
profit of $4.4 million and $6.1 million , and favorably impacted this segment's
operating margin by 0.7% and 0.4%, for the three and nine month periods,
respectively, and (c) the manufacturing market sector, inclusive of increased
gross profit from various project activities within the Western region of the
United States . For the nine months ended September 30, 2020 , the increase in
operating income of this segment was additionally a result of a decrease in
selling, general and administrative expenses given a reduction in salaries
expense as well as certain employee benefit costs. For both the three and nine
months ended September 30, 2020 , the gross profit margin improvements referenced
above were partially offset by an increase in the ratio of selling, general, and
administrative expenses to revenues, as a result of the revenue declines
experienced by this segment during the current year.
35
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Our United States mechanical construction and facilities services segment's
operating income for the three and nine months ended September 30, 2020 was
$80.0 million and $192.2 million , respectively, compared to operating income of
$61.2 million and $156.2 million for the three and nine months ended September
30, 2019 , respectively. Companies acquired in 2019 contributed incremental
operating income of $4.0 million and $7.6 million , inclusive of $3.7 million and
$11.5 million of amortization expense associated with identifiable intangible
assets, for the three and nine months ended September 30, 2020 , respectively.
Excluding the impact of businesses acquired, operating income of this segment
increased by approximately $14.8 million and $28.4 million for the three and
nine month periods, respectively. Despite the disruption caused by the COVID-19
pandemic during the current year, our United States mechanical construction and
facilities services segment experienced an increase in gross profit from
construction projects within the majority of the market sectors in which we
operate. Operating margin within this segment was 9.0% and 7.6% for the three
and nine months ended September 30, 2020 , respectively, compared to operating
margin of 7.0% and 6.4% for the three and nine months ended September 30, 2019 ,
respectively. The increase in operating margin for both periods was attributable
to an increase in gross profit margin, primarily driven by a favorable mix of
work within: (a) the manufacturing market sector, driven by certain large food
processing construction projects, and (b) the commercial market sector,
inclusive of a number of technology projects, which reached substantial
completion during the quarter. The increases in gross profit and gross profit
margin were partially offset by an increase in selling, general and
administrative expenses, as well as the ratio of selling, general and
administrative expenses to revenues, largely as a result of an increase in
incentive compensation expense due to the improved year-over-year operating
performance and an increase in amortization expense associated with identifiable
intangible assets resulting from companies acquired in 2019.
Operating income of our United States building services segment for the three
months ended September 30, 2020 was $38.2 million compared to operating income
for the three months ended September 30, 2019 of $35.1 million , and operating
income for the nine months ended September 30, 2020 was $85.4 million compared
to operating income of $90.5 million for the nine months ended September 30,
2019 . Companies acquired in 2020 contributed incremental operating income of
$1.5 million for both the three and nine months ended September 30, 2020 ,
inclusive of $1.2 million and $1.5 million of amortization expense associated
with identifiable intangible assets, for the three and nine month periods,
respectively. Excluding the impact of businesses acquired, operating income for
the three months ended September 30, 2020 increased marginally compared to the
prior year, primarily as a result of increased gross profit on new maintenance
contract awards within this segment's commercial site-based services division.
The decrease in operating income for the nine months ended September 30, 2020
was primarily due to: (a) our energy services operations, as a result of a
decline in gross profit given a reduction in large project activity, (b) our
mobile mechanical services operations due to a decrease in gross profit from
project and controls activities, largely as a result of the temporary closure of
certain customer facilities impacted by the COVID-19 pandemic, (c) a reduction
in gross profit within our commercial site-based services operations resulting
from a decrease in snow removal activities during the first three months of this
year, and (d) the loss of certain contracts not renewed pursuant to rebid, which
resulted in a reduction in gross profit from both base maintenance and
indefinite-delivery, indefinite-quantity projects within our government services
business. These reductions in gross profit were partially offset by an overall
decrease in selling, general and administrative expenses due to certain cost
reduction measures enacted during the year. Operating margin of this segment for
the three and nine months ended September 30, 2020 was 6.9% and 5.5%,
respectively, compared to operating margin for the three and nine months ended
September 30, 2019 of 6.6% and 5.8%, respectively. The increase in operating
margin for the three months ended September 30, 2020 was a result of a decrease
in the ratio of selling, general and administrative expenses to revenues,
partially offset by a reduction in gross profit margin driven by an unfavorable
mix of work within our government site-based services division. The decrease in
operating margin for the nine months ended September 30, 2020 was attributable
to a decrease in gross profit margin primarily within our energy services
operations due to the reduction in large project activity previously referenced.
Our United States industrial services segment reported an operating loss of $9.8
million for the three months ended September 30, 2020 , representing a decrease
of approximately $15.4 million compared to operating income of $5.6 million for
the three months ended September 30, 2019 . Operating income for the nine months
ended September 30, 2020 decreased by approximately $25.8 million to $5.4
million compared to operating income of $31.2 million for the nine months ended
September 30, 2019 . As previously referenced, this segment's results for both
2020 periods were severely impacted by adverse macroeconomic factors impacting
the oil and gas industry. As a result of such conditions, this segment
experienced a reduction in gross profit from both our field services and shop
services operations due to: (a) a decrease in demand for our service offerings,
(b) the deferral or cancellation of previously scheduled projects with certain
customers, and (c) an unfavorable mix of work, which included a greater number
of projects with lower than typical gross profit margins. In addition, for the
three months ended September 30, 2020 , the results of this segment were
negatively impacted by project stoppages resulting from hurricanes, including
certain named storms, within the Gulf Coast region. The aforementioned decreases
in gross profit were partially offset by a reduction in selling, general and
administrative expenses during both the three and nine month periods, including:
(a) incentive compensation and salaries expense, (b) employee benefit costs, and
(c) certain discretionary spending, such as travel and entertainment costs.
Operating margin of this segment for the three and nine months ended September
30 ,
36
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2020 was (7.0)% and 0.8%, respectively, compared to operating margin of 2.4% and
4.0% for the three and nine months ended September 30, 2019 , respectively. The
decrease in operating margin for both periods was attributable to a decrease in
gross profit margin resulting from the above noted factors, as well as an
increase in the ratio of selling, general and administrative expenses to
revenues due to a decrease in revenue without a commensurate decrease in certain
of this segment's fixed overhead costs.
Our United Kingdom building services segment operating income was $5.3 million
for the three months ended September 30, 2020 compared to operating income of
$4.8 million for the three months ended September 30, 2019 . Operating income was
$16.4 million for the nine months ended September 30, 2020 compared to operating
income of $14.4 million for the nine months ended September 30, 2019 . The
increase in operating income for both periods was primarily a result of
incremental gross profit from new maintenance contract awards. The exchange rate
movements for the British pound versus the United States dollar did not have a
significant impact on this segment's operating income for either the three or
nine month periods ended September 30, 2020 . Operating margin of 4.8% for the
three months ended September 30, 2020 was relatively consistent with operating
margin of 4.9% for the three months ended September 30, 2019 . For the nine
months ended September 30, 2020 , this segment's operating margin of 5.2%
compares favorably to operating margin of 4.5% for the nine months ended
September 30, 2019 . The increase in operating margin for such period was
attributable to an increase in gross profit margin, primarily as a result of a
more favorable mix of work, and a decrease in the ratio of selling, general and
administrative expenses to revenues.
Our corporate administration operating loss for the three and nine months ended
September 30, 2020 was $24.5 million and $70.0 million , respectively, compared
to $24.3 million and $74.1 million for the three and nine months ended September
30, 2019 , respectively. The decrease in corporate administration expenses for
the nine month period was primarily due to: (a) a decrease in incentive
compensation expense, (b) a decrease in salaries expense due to certain
short-term cost cutting measures, including temporary furloughs and salary
reductions, and (c) a reduction in professional fees.
Other items
Net interest expense for the three months ended September 30, 2020 and 2019 was
$1.5 million and $2.7 million , respectively. Net interest expense for the nine
months ended September 30, 2020 and 2019 was $6.1 million and $8.7 million ,
respectively. The decrease in net interest expense for both the three and nine
month periods resulted from lower interest rates, partially offset by higher
average outstanding borrowings.
For the three and nine months ended September 30, 2020 , our income tax provision
was $73.9 million and $62.2 million , respectively, compared to $31.6 million and
$92.3 million for the three and nine months ended September 30, 2019 ,
respectively. Our effective income tax rate for the three and nine months ended
September 30, 2020 was 54.7% and 53.9% respectively, compared to an effective
income tax rate for both the three and nine months ended September 30, 2019 of
27.9%. Our income tax rate and income tax provision for the three and nine
months ended September 30, 2020 were impacted by the tax-effect of the $232.8
million of non-cash goodwill, identifiable intangible asset, and other
long-lived asset impairment charges recorded during the second quarter, the
majority of which is non-deductible for tax purposes.
Remaining Unsatisfied Performance Obligations
The following table presents the transaction price allocated to remaining
unsatisfied performance obligations ("remaining performance obligations") for
each of our reportable segments and their respective percentage of total
remaining performance obligations (in thousands, except for percentages):
September 30, December 31, September 30,
2020 % of Total 2019 % of Total 2019 % of Total
Remaining performance obligations:
United States electrical construction
and facilities services $ 1,062,150 23 % $ 1,036,216 26 % $ 1,095,254 27 %
United States mechanical construction
and facilities services 2,633,017 58 % 2,229,090 55 % 2,190,556 54 %
United States building services 625,756 14 % 542,269 13 % 544,913 14 %
United States industrial services 75,662 2 % 104,613 3 % 83,478 2 %
Total United States operations 4,396,585 97 % 3,912,188 97 % 3,914,201 97 %
United Kingdom building services 133,566 3 % 124,176 3 % 120,887 3 %
Total worldwide operations $ 4,530,151 100 % $ 4,036,364 100 % $ 4,035,088 100 %
37-------------------------------------------------------------------------------- Table of Contents Remaining performance obligations increase with awards of new contracts and decrease as we perform work and recognize revenue on existing contracts. We include a project within our remaining performance obligations at such time as the project is awarded and agreement on contract terms has been reached. Our remaining performance obligations include amounts related to contracts for which a fixed price contract value is not assigned when a reasonable estimate of the total transaction price can be made. Remaining performance obligations include unrecognized revenues to be realized from uncompleted construction contracts. Although many of our construction contracts are subject to cancellation at the election of our customers, in accordance with industry practice, we do not limit the amount of unrecognized revenue included within remaining performance obligations for these contracts due to the inherent substantial economic penalty that would be incurred by our customers upon cancellation. We believe our reported remaining performance obligations for our construction contracts are firm and contract cancellations have not had a material adverse effect on us. Remaining performance obligations also include unrecognized revenues expected to be realized over the remaining term of service contracts. However, to the extent a service contract includes a cancellation clause which allows for the termination of such contract by either party without a substantive penalty, the remaining contract term, and therefore, the amount of unrecognized revenues included within remaining performance obligations, is limited to the notice period required for the termination. Our remaining performance obligations are 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, (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 the variable consideration constraint does not apply, and (e) other forms of variable consideration to the extent that such variable consideration has been included within the transaction price of our contracts. Such claim and other variable consideration amounts were immaterial for all periods presented. Our remaining performance obligations atSeptember 30, 2020 were$4.53 billion compared to$4.04 billion at bothDecember 31, 2019 andSeptember 30, 2019 . The increase in remaining performance obligations atSeptember 30, 2020 compared toDecember 31, 2019 was attributable to an increase in remaining performance obligations within all of our reportable segments, except for ourUnited States industrial services segment. Computer System Attack OnFebruary 15, 2020 , we became aware on an infiltration and encryption of portions of our information technology network. This attack temporarily disrupted our use of the impacted systems. As part of our investigation into this incident, we engaged outside security experts,who did not identify any exfiltration of customer or employee data or any inappropriate access to our accounting or finance systems. The Company maintains insurance coverage for these types of incidents; such policies, however, may not completely provide coverage for, or completely offset the costs of, this infiltration. Liquidity and Capital Resources The following section discusses our principal liquidity and capital resources, as well as our primary liquidity requirements and sources and uses of cash. Our cash and cash equivalents are maintained in highly liquid investments with original maturity dates of three months or less. Our short-term liquidity requirements primarily arise from: (a) working capital requirements, (b) business acquisitions, (c) cash dividend payments, (d) interest and principal payments related to our outstanding indebtedness, and (e) income tax payments. We can expect to meet those requirements through our cash and cash equivalent balances, cash generated from our operations, and the borrowing capacity available under our revolving credit facility. However, negative macroeconomic trends, including the impact of COVID-19, could have an adverse effect on future liquidity if we experience delays in the payment of outstanding receivables beyond normal payment terms or an increase in credit losses. In addition, during economic downturns, there have typically been fewer small discretionary projects from the private sector and our competitors have aggressively bid larger long-term infrastructure and public sector contracts. Short-term liquidity is also impacted by: (a) the type and length of construction contracts in place as performance of long duration contracts typically requires greater amounts of working capital, (b) the level of turnaround activities within ourUnited States industrial services segment as such projects are billed in arrears pursuant to contractual terms that are standard within the industry, and (c) the billing terms of our maintenance contracts, including those within ourUnited States andUnited Kingdom building services segments. While we strive to negotiate favorable billing terms which allow us to invoice in advance of costs incurred on certain of our contracts, there can be no assurance that such terms will be agreed to by our customers. 38 -------------------------------------------------------------------------------- Table of Contents Long-term liquidity requirements can be expected to be met initially through cash generated from operating activities and the borrowing capacity available under our revolving credit facility. Based upon our current credit ratings and financial position, we can also reasonably expect to be able to secure long-term debt financing if required to achieve our strategic objectives. Over the long term, our primary revenue risk factor continues to be the level of demand for non-residential construction as well as building and industrial services, all of which are influenced by macroeconomic trends including interest rates and governmental economic policy. In addition, our ability to perform work is critical to meeting our long-term liquidity requirements. Despite the economic uncertainty described above, we believe that our current cash and cash equivalents and the borrowing capacity available under our revolving credit facility or other forms of financing available to us through borrowings, combined with cash expected to be generated from our operations, will be sufficient to provide short-term and foreseeable long-term liquidity. Cash Flows 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, 2020 2019 Net cash provided by operating activities$ 546,834 $ 176,921 Net cash used in investing activities$ (77,219) $ (114,957) Net cash used in financing activities$ (147,594) $ (56,324)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
$ (1,304) $ (2,047) Our consolidated cash balance, including cash equivalents and restricted cash, increased by approximately$320.7 million from$359.9 million atDecember 31, 2019 to$680.6 million atSeptember 30, 2020 . Net cash provided by operating activities for the nine months endedSeptember 30, 2020 was$546.8 million compared to$176.9 million of cash provided by operating activities for the nine months endedSeptember 30, 2019 . The increase in cash provided by operating activities was primarily attributable to: (a) a decline in organic revenues during the period, primarily within ourUnited States industrial services segment, which resulted in a net reduction in outstanding accounts receivables, (b) the timing of invoicing to our customers, including advanced billings on our long-term construction contracts, and (c) a$67.3 million reduction in the payment of certain payroll taxes given the enactment of the Coronavirus Aid, Relief, and Economic Security Act, which provides that employers may defer payment of the employer's portion ofSocial Security taxes. Net cash used in investing activities for the nine months endedSeptember 30, 2020 decreased by approximately$37.7 million compared to the nine months endedSeptember 30, 2019 due to a decrease in payments for business acquisitions. Net cash used in financing activities for the nine months endedSeptember 30, 2020 was$147.6 million compared to net cash used in financing activities for the nine months endedSeptember 30, 2019 of$56.3 million . The increase in net cash used in financing activities was primarily due to a$99.0 million increase in funds used for the repurchase of our common stock. Debt UntilMarch 2, 2020 , we had a credit agreement dated as ofAugust 3, 2016 , which provided 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"). OnMarch 2, 2020 , we amended and restated the 2016 Credit Agreement to provide for a$1.3 billion revolving credit facility (the "2020 Revolving Credit Facility") and a$300.0 million term loan (the "2020 Term Loan") (collectively referred to as the "2020 Credit Agreement") expiringMarch 2, 2025 . We may increase the 2020 Revolving Credit Facility to$1.9 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to$400.0 million of available capacity under the 2020 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries. At the Company's election, borrowings under the 2020 Credit Agreement bear interest at either: (1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2)United States dollar LIBOR (0.15% atSeptember 30, 2020 ) 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 (3.25% atSeptember 30, 2020 ), (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 atSeptember 30, 2020 was 1.15%. A commitment fee is payable on the average daily unused amount of the 2020 Revolving Credit Facility, which ranges from 0.10% to 0.25%, based on certain financial tests. The fee was 0.10% of the unused amount as ofSeptember 30, 2020 . Fees for letters of credit issued under the 2020 Revolving Credit Facility range from 0.75% to 1.75% of the respective face amounts of outstanding letters of credit, depending on the nature of the letter of credit, and are computed based on certain financial tests. 39 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2020 andDecember 31, 2019 , the balance of the 2020 Term Loan and the 2016 Term Loan was$277.5 million and$254.4 million , respectively. As ofSeptember 30, 2020 , there were no direct borrowings outstanding under the 2020 Revolving Credit Facility; however, we had$78.8 million of letters of credit outstanding, which reduce the available capacity under such facility. As ofDecember 31, 2019 , we had$50.0 million in direct borrowings outstanding and$109.0 million of letters of credit outstanding under the 2016 Revolving Credit Facility. We capitalized an additional$3.1 million of debt issuance costs associated with the 2020 Credit Agreement. Debt issuance costs are amortized over the life of the agreement and are included as part of interest expense. Obligations under the 2020 Credit Agreement are guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets. The 2020 Credit Agreement contains various covenants providing for, among other things, the maintenance of certain financial ratios and certain limitations on the payment of dividends, common stock repurchases, investments, acquisitions, indebtedness, and capital expenditures. We were in compliance with all such covenants as ofSeptember 30, 2020 with respect to the 2020 Credit Agreement and, as ofDecember 31, 2019 , with respect to the 2016 Credit Agreement. We are required to make annual principal payments on the 2020 Term Loan. OnSeptember 30, 2020 , we made a voluntary prepayment of$22.5 million , which was applied against our scheduled payments on a ratable basis. A principal payment of$6.9 million is due onDecember 31, 2020 and principal payments of$13.9 million are due onDecember 31 of each subsequent year. All unpaid principal and interest is due onMarch 2, 2025 . Share Repurchase Program and Dividends InSeptember 2011 , our Board of Directors (the "Board") authorized a share repurchase program allowing us to begin repurchasing shares of our outstanding common stock. Subsequently, the Board has from time to time increased the amount of our common stock that we may repurchase under such program. Since the inception of the repurchase program, the Board has authorized us to repurchase up to$1.15 billion of our outstanding common stock. During the nine months endedSeptember 30, 2020 , we repurchased approximately 1.5 million shares of our common stock for approximately$99.0 million . During the second and third quarters of 2020, we did not repurchase any shares of our common stock. Since the inception of the repurchase program throughSeptember 30, 2020 , we have repurchased approximately 17.4 million shares of our common stock for approximately$890.5 million . As ofSeptember 30, 2020 , there remained authorization for us to repurchase approximately$259.5 million of our shares. The repurchase program has no expiration date, does 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 2020 Credit Agreement placing limitations on such repurchases. The repurchase program has been and will be funded from our operations. We have paid quarterly dividends sinceOctober 25, 2011 . We currently pay a regular quarterly dividend of$0.08 per share. Our 2020 Credit Agreement places limitations on the payment of dividends on our common stock. However, we do not believe that the terms of such agreement currently materially limit our ability to pay a quarterly dividend of$0.08 per share for the foreseeable future. The payment of dividends has been and will be funded from our operations. Off-Balance Sheet Arrangements and Other Commitments The terms of our construction contracts frequently require that we obtain from surety companies ("Surety Companies") and provide to our customers payment and performance bonds ("Surety Bonds") as a condition to the award of such contracts. Surety Bonds are issued in return for premiums, which vary depending on the size and type of the bond, and secure our payment and performance obligations under such contracts. We have agreed to indemnify the Surety Companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. Public sector contracts require Surety Bonds more frequently than private sector contracts and, accordingly, our bonding requirements typically increase as the amount of our public sector work increases. In addition, at the request of labor unions representing certain of our employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. As ofSeptember 30, 2020 , based on the percentage-of-completion of our projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately$1.3 billion , which represents approximately 28% of our total remaining performance obligations. We are not aware of any losses in connection with Surety Bonds, which have been posted on our behalf, and we do not expect to incur significant losses in the foreseeable future. From time to time, we discuss with our current and other Surety Bond providers the amounts of Surety Bonds that may be available to us based on our financial strength and the absence of any default by us on any Surety Bond issued on our behalf and believe those amounts are currently adequate for our needs. However, if we experience changes in our bonding relationships or if there are adverse changes in the surety industry, we may (a) seek to satisfy certain customer requests for Surety Bonds by posting other forms of collateral in lieu of Surety Bonds, such as letters of credit, parent company guarantees or cash, in order to convince customers to forego the requirement for Surety Bonds, (b) increase our activities in our business 40 -------------------------------------------------------------------------------- Table of Contents segments that rarely require Surety Bonds, such as our building and industrial services segments, and/or (c) refrain from bidding for certain projects that require Surety Bonds. There can be no assurance that we would be able to effectuate alternatives to providing Surety Bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require Surety Bonds. Accordingly, if we were to experience a reduction in the availability of Surety Bonds, we could experience a material adverse effect on our financial position, results of operations and/or cash flows. In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees. We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein. Contractual Obligations The following is a summary of material contractual obligations and other commercial commitments (in millions): Payments Due by Period Less than 1-3 3-5 More than Contractual Obligations Total 1 year years years 5 years Term loan (including interest at 1.15%) (1)$ 290.4 $ 10.1 $ 33.7 $ 246.6 $ - Finance leases 9.3 4.0 4.1 1.1 0.1 Operating leases 286.3 61.2 91.1 57.6 76.4 Open purchase obligations (2) 1,385.4 1,103.1 234.8 47.5 - Other long-term obligations, including current portion (3) 451.7 74.4 367.7 9.6 - Total Contractual Obligations$ 2,423.1 $ 1,252.8 $ 731.4 $ 362.4 $ 76.5
Amount of Commitment Expiration by Period
Less
Total than 1 1-3 3-5 More than
Other Commercial Commitments Committed year years years 5 years
Letters of credit $ 78.8 $ 78.8 $ - $ - $ -
_________
(1)As of September 30, 2020 , the amount outstanding under the 2020 Term Loan was
$277.5 million . There were no direct borrowings outstanding under the 2020
Revolving Credit Facility.
(2)Represents open purchase orders for material and subcontracting costs related
to construction and services contracts. These purchase orders are not reflected
in EMCOR's Consolidated Balance Sheets and should not impact future cash flows
as amounts should be recovered through customer billings.
(3)Primarily represents insurance related liabilities, and liabilities for
deferred income taxes, incentive compensation and deferred compensation,
classified as other long-term liabilities in the Consolidated Balance Sheets.
Cash payments for insurance and deferred compensation related liabilities may be
payable beyond three years; however, because it is not practical to estimate
these payments, these liabilities are reflected in the 1-3 years payment period.
We provide funding to our post retirement plans based on at least the minimum
funding required by applicable regulations. In determining the minimum required
funding, we utilize current actuarial assumptions and exchange rates to forecast
amounts that may be payable for up to five years in the future. In our judgment,
minimum funding estimates beyond a five year time horizon cannot be reliably
estimated and, therefore, have not been included in the table.
Legal Proceedings
We are involved in several legal proceedings in which damages and claims have
been asserted against us. While litigation is subject to many uncertainties and
the outcome of litigation is not predictable with assurance, we do not believe
that any such matters will have a material adverse effect on our financial
position, results of operations or liquidity.
Certain Insurance Matters
As of September 30, 2020 and December 31, 2019 , we utilized approximately $78.7
million of letters of credit obtained under our 2020 Revolving Credit Facility
and $108.9 million of letters of credit obtained under our 2016 Revolving Credit
Facility, respectively, as collateral for our insurance obligations.
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New Accounting Pronouncements
We review new accounting standards to determine the expected financial impact,
if any, that the adoption of such standards will have. See Note 2 - New
Accounting Pronouncements of the notes to consolidated financial statements
included in Item 1. Financial Statements for further information regarding new
accounting standards, including the anticipated dates of adoption and the
effects on our consolidated financial position, results of operations or
liquidity.
Application of Critical Accounting Policies
Our consolidated financial statements are based on the application of
significant accounting policies, which require management to make significant
estimates and assumptions. Our significant accounting policies are described in
Note 2 - Summary of Significant Accounting Policies of the notes to consolidated
financial statements included in Item 8 of our annual report on Form 10-K for
the year ended December 31, 2019 . We believe that some of the more critical
judgment areas in the application of accounting policies that affect our
financial condition and results of operations are the impact of changes in the
estimates and judgments pertaining to: (a) revenue recognition from contracts
with customers; (b) collectibility or valuation of accounts receivable;
(c) insurance liabilities; (d) income taxes; and (e) goodwill, identifiable
intangible assets, and other long-lived assets.
Revenue Recognition from Contracts with Customers
We believe our most critical accounting policy is revenue recognition in
accordance with Accounting Standards Codification Topic 606, "Revenue from
Contracts with Customers" ("ASC 606"). In accordance with ASC 606, the Company
recognizes revenue by applying the following five step model: (1) identify the
contract with a customer, (2) identify the performance obligations in the
contract, (3) determine the transaction price, (4) allocate the transaction
price to performance obligations in the contract, and (5) recognize revenue as
performance obligations are satisfied.
The Company recognizes revenue at the time the related performance obligation is
satisfied by transferring a promised good or service to its customers. A good or
service is considered to be transferred when the customer obtains control. The
Company can transfer control of a good or service and satisfy its performance
obligations either over time or at a point in time. The Company transfers
control of a good or service over time and, therefore, satisfies a performance
obligation and recognizes revenue over time if one of the following three
criteria are met: (a) the customer simultaneously receives and consumes the
benefits provided by the Company's performance as we perform, (b) the Company's
performance creates or enhances an asset that the customer controls as the asset
is created or enhanced, or (c) the Company's performance does not create an
asset with an alternative use to us, and we have an enforceable right to payment
for performance completed to date.
For our performance obligations satisfied over time, we recognize revenue by
measuring the progress toward complete satisfaction of that performance
obligation. The selection of the method to measure progress towards completion
can be either an input method or an output method and requires judgment based on
the nature of the goods or services to be provided.
For our construction contracts, revenue is generally recognized over time as our
performance creates or enhances an asset that the customer controls as it is
created or enhanced. Our fixed price construction projects generally use a
cost-to-cost input method to measure our progress towards complete satisfaction
of the performance obligation as we believe it best depicts the transfer of
control to the customer which occurs as we incur costs on our contracts. Under
the cost-to-cost measure of progress, the extent of progress towards completion
is measured based on the ratio of costs incurred to date to the total estimated
costs at completion of the performance obligation. For our unit price
construction contracts, progress towards complete satisfaction is measured
through an output method, such as the amount of units produced or delivered,
when our performance does not produce significant amounts of work in process or
finished goods prior to complete satisfaction of such performance obligations.
For our services contracts, revenue is also generally recognized over time as
the customer simultaneously receives and consumes the benefits of our
performance as we perform the service. For our fixed price service contracts
with specified service periods, revenue is generally recognized on a
straight-line basis over such service period when our inputs are expended
evenly, and the customer receives and consumes the benefits of our performance
throughout the contract term.
The timing of revenue recognition for the manufacturing of new build heat
exchangers within our United States industrial services segment depends on the
payment terms of the contract, as our performance does not create an asset with
an alternative use to us. For those contracts for which we have a right to
payment for performance completed to date at all times throughout our
performance, inclusive of a cancellation, we recognize revenue over time. For
these performance obligations, we use a cost-to-cost input method to measure our
progress towards complete satisfaction of the performance obligation as we
believe it best depicts the transfer of control to the customer which occurs as
we incur costs on our contracts. However, for those contracts for which we do
not have a right, at all times, to payment for performance completed to date, we
recognize revenue at the point in time when control is transferred to the
customer. For bill-and-hold arrangements, revenue is recognized when the
customer obtains control of the heat exchanger, which may be prior to shipping,
if certain recognition criteria are met.
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For certain of our revenue streams, such as call-out repair and service work,
outage services, refinery turnarounds and specialty welding services that are
performed under time and materials contracts, our progress towards complete
satisfaction of such performance obligations is measured using an output method
as the customer receives and consumes the benefits of our performance completed
to date.
Due to uncertainties inherent in the estimation process, it is possible that
estimates of costs to complete a performance obligation will be revised in the
near-term. For those performance obligations for which revenue is recognized
using a cost-to-cost input method, changes in total estimated costs, and related
progress towards complete satisfaction of the performance obligation, are
recognized on a cumulative catch-up basis in the period in which the revisions
to the estimates are made. When the current estimate of total costs for a
performance obligation indicate a loss, a provision for the entire estimated
loss on the unsatisfied performance obligation is made in the period in which
the loss becomes evident. For the three and nine months ended September 30, 2020
and 2019, there were no changes in total estimated costs that had a significant
impact on our operating results. In addition, there were no significant losses
recognized during the three and nine months ended September 30, 2020 and 2019.
The timing of revenue recognition may differ from the timing of invoicing to
customers. Contract assets include unbilled amounts from our long-term
construction projects when revenues recognized under the cost-to-cost measure of
progress exceed the amounts invoiced to our customers, as the amounts cannot be
billed under the terms of our contracts. Such amounts are recoverable from our
customers based upon various measures of performance, including achievement of
certain milestones, completion of specified units or completion of a contract.
In addition, many of our time and materials arrangements, as well as our
contracts to perform turnaround services within the United States industrial
services segment, are billed in arrears pursuant to contract terms that are
standard within the industry, resulting in contract assets and/or unbilled
receivables being recorded, as revenue is recognized in advance of billings.
Also included in contract assets are amounts we seek or will seek to collect
from customers or others for errors or changes in contract specifications or
design, contract change orders or modifications in dispute or unapproved as to
scope and/or price, or other customer-related causes of unanticipated additional
contract costs (claims and unapproved change orders). Our contract assets do not
include capitalized costs to obtain and fulfill a contract. Contract assets are
generally classified as current within the Consolidated Balance Sheets.
Contract liabilities from our long-term construction contracts arise when
amounts invoiced to our customers exceed revenues recognized under the
cost-to-cost measure of progress. Contract liabilities additionally include
advanced payments from our customers on certain contracts. Contract liabilities
decrease as we recognize revenue from the satisfaction of the related
performance obligation and are recorded as either current or long-term,
depending upon when we expect to recognize such revenue. The long-term portion
of contract liabilities is included in "Other long-term obligations" in the
Consolidated Balance Sheets.
See Note 3 - Revenue from Contracts with Customers of the notes to consolidated
financial statements included in Item 1. Financial Statements for further
disclosure regarding revenue recognition.
Accounts Receivable
Accounts receivable are recognized in the period we deliver goods or provide
services to our customers or when our right to consideration is unconditional.
We evaluate the collectibility of specific accounts receivable when we believe a
customer, or group of customers, may not be able to meet their financial
obligations due to deterioration in financial condition or credit rating. In
addition, a considerable amount of judgment is required in assessing the
likelihood of realization of receivables. Relevant factors include our prior
collection history with our customers, the related aging of past due balances,
projections of credit losses based on historical trends in credit quality
indicators or past events, and forecasts of future economic conditions.
Management reviews the credit quality of its receivables by, among other things,
obtaining credit ratings of significant customers, assessing economic and market
conditions, and evaluating material changes to a customer's business, cash
flows, and financial condition. At September 30, 2020 and December 31, 2019 , our
accounts receivable of $1,942.3 million and $2,030.8 million , respectively, were
recorded net of allowances for credit losses of $19.3 million and $14.5 million ,
respectively. Due to the economic disruption caused by COVID-19, our allowance
for credit losses increased based on our evaluation of: (a) specific outstanding
balances and (b) forecasts of future economic conditions and the expected impact
on customer collections. Allowances for credit losses are based on the best
facts available and are reassessed and adjusted on a regular basis as additional
information is received. Should anticipated collections fail to materialize, or
if future economic conditions compare unfavorably to our forecasts, we could
experience an increase in our allowances for credit losses.
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Insurance Liabilities
We have loss payment deductibles for certain workers' compensation, automobile
liability, general liability, and property claims, have self-insured retentions
for certain other casualty claims and are self-insured for employee-related
healthcare claims. In addition, we maintain a wholly-owned captive insurance
subsidiary to manage certain of our insurance liabilities. Losses are recorded
based upon estimates of our liability for claims incurred and for claims
incurred but not reported. The liabilities are derived from known facts,
historical trends and industry averages utilizing the assistance of an actuary
to determine the best estimate for the majority of these obligations. We believe
the liabilities recognized on the Consolidated Balance Sheets for these
obligations are adequate. However, such obligations are difficult to assess and
estimate due to numerous factors, including severity of injury, determination of
liability in proportion to other parties, timely reporting of occurrences and
effectiveness of safety and risk management programs. Therefore, if our actual
experience differs from the assumptions and estimates used for recording the
liabilities, adjustments may be required and will be recorded in the period that
the experience becomes known. Our estimated net insurance liabilities for
workers' compensation, automobile liability, general liability, and property
claims increased by $4.6 million at September 30, 2020 compared to December 31,
2019 , partially as a result of greater potential exposures, including the impact
of acquired companies. If our estimated insurance liabilities for workers'
compensation, automobile liability, general liability, and property claims were
to increase by 10%, it would have resulted in $17.4 million of additional
expense for the nine months ended September 30, 2020 .
Income Taxes
Deferred income tax assets and liabilities are recognized for temporary
differences between the financial statement and income tax bases of assets and
liabilities as well as for net operating loss and tax credit carryforwards.
Deferred income taxes are valued using enacted tax rates expected to be in
effect when income taxes are paid or recovered, with the effect of a change in
tax laws or rates recognized in the statement of operations in the period in
which such change is enacted. The ultimate realization of deferred income tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Deferred income
taxes are recorded net of a valuation allowance when it is more likely than not
that all or a portion of a deferred tax asset will not be realized. In making
such determination, we consider all available evidence, including projections of
future taxable income, tax-planning strategies, and recent results of
operations.
At September 30, 2020 and December 31, 2019 , we had net deferred income tax
liabilities of $43.4 million and $71.7 million , respectively, primarily
resulting from differences between the carrying value and income tax bases of
certain identifiable intangible assets, goodwill, and depreciable fixed assets.
Included within these net deferred income tax liabilities are $192.7 million and
$176.2 million of deferred income tax assets as of September 30, 2020 and
December 31, 2019 , respectively. The total valuation allowance on deferred
income tax assets, primarily related to state net operating loss carryforwards,
was approximately $3.5 million as of both September 30, 2020 and December 31,
2019 . Based on our taxable income, which has generally exceeded the amount of
our net deferred tax asset balance, as well as current projections of future
taxable income, we have determined that it is more likely than not that our net
deferred income tax assets will be realized. However, revisions to our forecasts
or declining macroeconomic conditions could result in changes to our assessment
of the realization of these deferred tax assets.
Goodwill , Identifiable Intangible Assets, and Other Long-Lived Assets
As of September 30, 2020 and December 31, 2019 , we had goodwill of $846.9
million and $1,063.9 million , respectively, arising out of the acquisition of
businesses. Goodwill is not amortized but instead allocated to its respective
reporting unit and evaluated for impairment annually, or more frequently if
events or circumstances indicate that the carrying amount of goodwill may be
impaired. We have determined that our reporting units are consistent with the
reportable segments identified in Note 15 - Segment Information of the notes to
consolidated financial statements. As of September 30, 2020 , approximately 16.8%
of our goodwill related to our United States electrical construction and
facilities services segment, approximately 35.4% related to our United States
mechanical construction and facilities services segment, approximately 35.1%
related to our United States building services segment, and approximately 12.7%
related to our United States industrial services segment.
Absent any earlier identified impairment indicators, we perform our annual
goodwill impairment assessment on October 1 each fiscal year. Qualitative
indicators that may trigger the need for interim quantitative impairment testing
include, among others, a deterioration in macroeconomic conditions, declining
financial performance, deterioration in the operational environment, or an
expectation of selling or disposing of a portion of a reporting unit.
Additionally, an interim impairment test may be triggered by a significant
change in business climate, a loss of a significant customer, increased
competition, or a sustained decrease in share price. In assessing whether our
goodwill is impaired, we compare the fair value of the reporting unit to its
carrying amount, including goodwill. If the fair value exceeds the carrying
amount, no impairment is recognized. However, if the carrying amount of the
reporting unit exceeds the fair value, the goodwill of the reporting unit is
impaired and an impairment loss in the amount of the excess is recognized and
charged to operations.
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Our operations were significantly impacted by the COVID-19 pandemic starting
with the second quarter of 2020. During the same period, the demand for oil
significantly deteriorated as a result of the pandemic and the corresponding
preventative measures taken around the world to mitigate the spread of the
virus, including various local, state, and national jurisdictional
"shelter-in-place" orders. Further, other macroeconomic events, including the
escalation of geopolitical tensions between the Organization of Petroleum
Exporting Countries (OPEC) and Russia , resulted in a significant drop in the
price of crude oil. These negative factors created significant volatility and
uncertainty in the markets in which our United States industrial services
segment operates, resulting in a significant decrease in the demand for our
service offerings. Consequently, in the second quarter of 2020, we revised our
near-term revenue and operating margin expectations for our United States
industrial services segment.
As a result of such developments, we concluded that a triggering event had
occurred which indicated it was more likely than not that the fair value of our
United States industrial services segment was less than its carrying amount.
Accordingly, during the second quarter of 2020, we performed a quantitative
impairment test and determined that the carrying amount of our United States
industrial services segment exceeded its fair value, resulting in the
recognition of a non-cash goodwill impairment charge of $225.5 million , which is
included within our results of operations for the nine months ended September
30, 2020 . We did not identify any impairment indicators or record any additional
impairment of goodwill during the three months ended September 30, 2020 .
As part of our second quarter impairment test, we determined the fair value of
our United States industrial services segment using an income approach whereby
fair value was calculated utilizing discounted estimated future cash flows,
assuming a risk-adjusted industry weighted average cost of capital of 12.0%.
Such weighted average cost of capital was developed with the assistance of an
independent third-party valuation specialist and reflects the overall level of
inherent risk within the business and the rate of return a market participant
would expect to earn. Cash flow projections were derived from internal forecasts
of anticipated revenue growth rates and operating margins, updated for recent
events, with cash flows beyond the discrete forecast period estimated using a
terminal value calculation which incorporated historical and forecasted trends,
an estimate of long-term growth rates, and assumptions about the future demand
for our services. The perpetual growth rate utilized in the terminal value
calculation was 2.0%.
We did not identify any indicators of impairment with respect to our remaining
reporting units during the nine months ended September 30, 2020 . As such, for
these reporting units, no impairment test was required to be performed
subsequent to the date of our latest annual impairment test (October 1, 2019 ).
As of the date of such test, the fair values of 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 exceeded their carrying values by approximately $1,321.8
million , $2,011.5 million , and $922.3 million , respectively. The weighted
average cost of capital utilized in the determination of fair value was 9.5% and
9.1% for our United States construction segments and our United States building
services segment, respectively. The perpetual growth rate used for our annual
testing was 2.7% for each of these segments.
Due to the inherent uncertainties involved in making estimates, our assumptions
may change in future periods. Estimates and assumptions made for purposes of our
goodwill impairment testing may prove to be inaccurate predictions of the
future, and other factors used in assessing fair value, such as the weighted
average cost of capital, are outside the control of management. Unfavorable
changes in certain of these key assumptions may affect future testing results.
For example, as of the date of the most recent impairment test for each of our
reporting units, keeping all other assumptions constant, a 50 basis point
increase in the weighted average cost of capital would cause the estimated fair
value of our United States electrical construction and facilities services
segment, our United States mechanical construction and facilities services
segment, our United States building services segment, and our United States
industrial services segment to decrease by approximately $108.8 million , $156.7
million , $98.0 million , and $22.9 million , respectively. In addition, as of the
date of the most recent impairment test for each of our reporting units, keeping
all other assumptions constant, a 50 basis point reduction in the perpetual
growth rate would cause the estimated fair values of our United States
electrical construction and facilities services segment, our United States
mechanical construction and facilities services segment, our United States
building services segment, and our United States industrial services segment to
decrease by approximately $61.4 million , $90.5 million , $55.7 million , and $9.0
million , respectively. Given the amounts by which the fair value exceeds the
carrying value for each of our reporting units, other than our United States
industrial services segment, the decreases in estimated fair values described
above would not have significantly impacted the results of our impairment tests.
In the case of our United States industrial services segment, however, upon
completion of our second quarter goodwill impairment assessment and the
recognition of the aforementioned impairment charge, the carrying value of this
reporting unit equals its fair value. Therefore, any subsequent declines in fair
value would result in a further impairment of this reporting unit's goodwill.
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As of September 30, 2020 and December 31, 2019 , net identifiable intangible
assets (primarily consisting of our contract backlog, developed
technology/vendor network, customer relationships, and subsidiary trade names)
arising out of the acquisition of businesses were $596.7 million and $611.4
million , respectively. The determination of related estimated useful lives for
identifiable intangible assets and whether those assets are impaired involves
significant judgments based upon short and long-term projections of future
performance. These forecasts reflect assumptions regarding anticipated
macroeconomic conditions as well as our ability to successfully integrate
acquired businesses.
Absent earlier indicators of impairment, we test for impairment of subsidiary
trade names that are not subject to amortization on an annual basis (October 1 ).
In performing this test, we calculate the fair value of each trade name using
the "relief from royalty payments" methodology. This approach involves two
steps: (a) estimating reasonable royalty rates for each trade name and (b)
applying these royalty rates to a net revenue stream and discounting the
resulting cash flows to determine fair value. This fair value is then compared
with the carrying value of each trade name. If the carrying amount of the trade
name is greater than the implied fair value of the trade name, an impairment in
the amount of the excess is recognized and charged to operations. In addition,
we review for impairment of identifiable intangible assets that are being
amortized as well as other long-lived assets whenever facts and circumstances
indicate that their carrying values may not be fully recoverable. This test
compares their carrying values to the undiscounted pre-tax cash flows expected
to result from the use of the assets. If the assets are impaired, the assets are
written down to their fair values, generally determined based on their
discounted estimated future cash flows.
In connection with the negative market conditions disclosed above, we also
evaluated certain of our identifiable intangible assets and other long-lived
assets for impairment during the second quarter of 2020. Such assets included
those associated with the businesses in our United States industrial services
segment and certain businesses within our United States electrical construction
and facilities services segment whose results are also highly dependent on the
strength of the oil and gas industry. As a result of these assessments, we
recorded non-cash impairment charges of $7.3 million , which have been included
within our results of operations for the nine months ended September 30, 2020 .
Of this amount, $4.8 million related to our United States industrial services
segment and was comprised of: (a) a $4.2 million subsidiary trade name
impairment and (b) a $0.6 million impairment on certain other long-lived assets.
The remaining $2.5 million represented a subsidiary trade name impairment within
our United States electrical construction and facilities services segment. For
the three months ended September 30, 2020 , no impairment of our identifiable
intangible assets or other long-lived assets was recognized.
As referenced above, impairment testing is based upon assumptions and estimates
determined by management from a review of our operating results and business
plans as well as forecasts of anticipated growth rates and margins, among other
considerations. In addition, estimates of weighted average costs of capital are
developed with the assistance of an independent third-party valuation
specialist. These assumptions and estimates can change in future periods,
especially in consideration of the uncertainty created by the COVID-19 pandemic
and its continued impact on the broader economy and our results of operations.
Significant adverse changes to external market conditions or our internal
forecasts, if any, could result in future impairment charges. It is not possible
at this time to determine if any future impairment charge will result or, if it
does, whether such a charge would be material to our results of operations.
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