EMCOR Group Inc (EME) 2002 Q3 法說會逐字稿

Good morning, Ladies and Gentlemen. I would like to welcome everyone to the EMCOR Group's 2002 third quarter conference call.

All lines have been placed on mute, to prevent any background noise. After the speakers, [INAUDIBLE] there will be a question and answer period. If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad.

If you would like to withdraw your question, press star and the number 2 on your telephone keypad. Thank you. I would now like to turn the call over to Eric Voyribbon of FD Morgan Walk.

Good morning. This is Eric Voyribbon of FD Morgan Walk, and I like to welcome you to the EMCOR Group earnings conference call. We're here to discuss the company's 2002 third quarter results. I'd now like to turn the call over to Bruce Regowski, Director of Communications at EMCOR, who will introduce management. Bruce, please go ahead.

Thank you, Eric. And good morning, everyone. Welcome to EMCOR Group's third quarter conference call. For those of you who are accessing the call via the website, welcome. We hope you have navigated the directions to arrive at the first slide of the slide presentation that will accompany Frank McInnis's remarks.

Currently all web listeners should be on slide one, which is the EMCOR title slide. During the call, instructions will be given for you to hit the forward arrow which will advance the presentation to the next slide.

This is one of those times. Please advance to slide two. Slide two depicts the executives who are with me to discuss the quarters and nine months result. They are Frank MacInnis, Chairman of the Board and Chief Executive Officer, Leicle Chesser, Executive Vice President and Chief Financial Officer, Mark Pompa, Vice President and Comptroller and Sheldon Cammaker, Executive Vice President and General Counsel.

For qualified participants who are not accessing the call via the internet, this presentation will archived at the investor overview section of our website. You can find us at www.emcorgroup.com.

Before we begin, I must let you know that this call may contain forward looking statements These are based on certain assumptions and expectations of forward-looking statements. These statements are based on certain assumptions and perceptions based on historical trends, current conditions, successive future developments, and other factors we believe are appropriate. Actual results or developments may differ materially from those anticipated in these statements. Now, with that out of the way, please let me turn the call over to Frank MacInnis. Frank?

Thank you, Bruce, who is filling in ably for Kevin Matz this morning, although those are very small shoes to fill.

Incidentally, that was Bruce on the violin before we started the broadcast. So he's a man of many parts.

Good morning, everyone. Welcome to the 31st quarterly conference calls for investors, analysts and other friends of EMCOR group. Welcome also to those participating on this call via our simultaneous web cast, continuing a policy we started with last quarter's call, we'll be including some web cast slides, illustrating a segment of our business that deserves special attention. And I'll be giving an audio commentary on the sector for those on the phone call.

In order to coordinate our series of web cast slides with my presentation, I'll be referring to the slide number, which is located in the lower left-hand corner of the slide. And right now, we're on slide number 2.

Today's call will proceed in our normal format, beginning with a discussion of the third quarter and year-to-date financial results, which we released this morning, followed by a review of our resulting balance sheet.

Then we'll discuss the record level of construction and facility services backlog, which we also announced this morning, with special mention of notable contract awards, which contributed to backlog growth during the last quarter. At that point in the presentation, I'm going to take a few moments to discuss the water and wastewater treatment segments and we have slides to show in that regard. I'll close with general comments about our markets. Including apparent trends and demands for our various services and possible acquisitions or investment opportunities.

Finally, there will be a chance for you to make comments or to ask us questions and a number of EMCOR's senior management are here with me to assist with the answers.

Let's begin by clicking to slide 3. The third quarter and year-to-date results, which we announced this morning, were the best in our history. Setting new records for revenue, gross profit, operating income, net income, EBITDA, and diluted earnings per share. Over the last eight years, it's been my privilege and pleasure on a number of occasions to announce record performance by EMCOR as our operational model demonstrated its validity quarter after quarter. But I'm especially pleased with this quarterly and year-to-date performance since it was achieved notwithstanding very difficult market conditions.

In the third quarter, each of the elements of our diversity, which is central to our business model, contributed to corporate growth. Our diversity of services, in which we seek to achieve an appropriate balance between our specialty construction and facility services operations, recently reached an important milestone as our U.S. facilities service operations reached profitibility for the quarter, and for the year to date.

Increasing demand for these services and their potential for future growth is epitomized by the Bank One relationship we announced last quarter. And there are many new opportunities arising.

Our diversity of geography in which we seek to derive revenue and profit opportunities from a multitude of geographic markets proved its worth this quarter as our Canadian operations reflected strong growth in both revenue and profitability; and Britian increased strongly in both revenue and backlog terms. And we strive to appeal to the broadest possible portion of the public and private sectors of the economy is reflected in our backlog report. We set a new record for contract backlog, $2.85 billion.

By continuing our successful transitions to segments of the economy like transportation, education, and public infrastructure, amid continued weakness and caution in the commercial construction market. As a result of this diversity, revenue in the third quarter was $1.05 billion, a 24% increase over the same quarter a year ago.

Although we don't dwell much over revenue figures within EMCOR management, it's worthy to note that this was our first billion dollar quarter. Operating income rose 36% to 35.9 million or 3.4% of revenues, compared to 3.1% in the year-ago figure. Net income was 19.5 million, 26% higher than the third quarter of 2001 and EBITDA for the quarter was $40 million.

The companies we acquired from Comfort Systems USA, in the first quarter of this year, continued to perform well, indicating a smooth and effective transition to membership in EMCOR Group. In the third quarter, the former Comfort Systems Companies contributed about 150 million to revenues and about 7.5 million to operating income. At the same time, our quarterly revenues from organic sources rose 9.5% or about $50 million.

Please move to slide number 4. Our year-to-date results also reflect continued growth and new highs in all aspects of our corporate performance. Although year-to-date organic revenues show a modest decline of 2% compared to year-ago earlier figures, overall revenues of $2.58 billion were 11.5% higher than the corresponding period of 2001. Operating income for the nine-month period was $75.3 million, a 29% increase over 2001, and 2.6% of revenues, compared to 2.3% a year ago.

Net income was 41.6 million dollars or 2.69 per diluted share. 27% higher than a year earlier. As usual, in such a diversified company, these excellent results were the result of a number of different factors.

We've had particularly strong performance from our Canadian company and from our San Diego, Denver, Las Vegas, and Washington, D.C. operations, helping to offset the lack of fast-track telecommunications projects, which we enjoyed in 2001. But the big development story this year is the crossover into profitability for the quarter and for the year-to-date of our U.S. facility services business, which has contributed $5 million of improvement to our operating income to date this year.

U.S. facilities services has achieved a critical mass and the service delivery capability, which are prerequisites to accelerated growth in the years to come.

Please turn to slide number 5. EMCOR's balance sheet continues to be one of the strongest and most liquid in our sector. Perhaps at the end of the third quarter was about $89 million, even though this is the time of year we would expect to be net investors in our portfolio contracts.

One major factor in our excellent liquidity performance was our net overbuild position. At September 30th, we were net overbuild across our portfolio by some 167 million dollars, reflecting EMCOR's continued discipline approach to maximumization cash. Total debt of $23 million consists almost entirely of notes payable to the companies which we assumed at the acquisition. I'll return to the top of our liquidity and debt capacity in a couple of minutes.

Please click on slide number 6. Construction at facility service contract backlog, calculated with our usual conservetism reached a record level of $2.85 billion at the end of the third quarter. As shown in slide 6, this was accomplished despite continued weakness in the private sector and commercial sections sector, filled in green at the bottom of the bar graphs.

More than offseting this weakness was continued strength in our health care, transportations, ininstitutional and water and waste treatment businesses.

On slide 7, you'll see a list of some of the third quarter contract awards that led to our record-setting backlog total. In Chicago, dips in electric will be replacing four, 2,000-kilowatt standby generators at associated [INAUDIBLE] for the Southwest Chicago pumping station.

While Hansen mechanical received a major award for the South Hills hospital in Las Vegas, a valuable balance to our hospitality and casino work in that market. Our Boston-based subsidiary,JC Higgins will perform the HGAC installations in the new Boston University ice arena on the BU campus. A 6,800 seat state of the art facility.

In New York, a joint venture of our Heritage and Mont Belle companies is providing updated environmental contral systems, while maintaining strict temperature and humidity controls during the construction process to prevent damage to the priceless collections of the Museum of Modern Art.

While the Colorado Convention Center projects, including exhibit space, meeting rooms, ballroom auditorium, and light rail transportation system, will receive complete mechanical engineering systems from Denver-based [INAUDIBLE].

In San Diego, University Mechanical is responsible for the plumbing, piping, processed piping, and HDAC work on a new, ultrasophisticated 185,000-square-foot laboratory facility for Johnson and Johnson pharmaceuticals, and our New York-based Weldbacks Electrics will be replacing computerized motors on the Long Island Expressway. These are the signs that inform you that your traffic jam extends for another 48 miles.

Hartford Mechanical, of Hartford, will install the HDAC, plumbing and fire protection systems for a new 290,000-square-foot regional food processing and warehouse facility for Pepperidge Farm in Connecticut. They will be joined by Shamron and Sons, a former Comfort Systems Company, for the installation of an ammonia refridgeration system at the same facility.

And in Toronto, Canada, Comstock Canada is taking the lead role in the design/build procurements, installations and commissioning of process control system components for the city's four water production plants to ensure the continued availability of sufficient qualities of clean water for the city of Toronto.

In many areas of North America, EMCOR companies are taking the lead role in providing state of the art solutions as cities deal with growing problems with water quality.

In some areas, notably Florida and parts of the far west, aquifer depletion has resulted in sea water incursion and brackish conditions for drinking water. Obviously an unacceptable situation.. Membrane water treatment technologies, where contaminated water is passed through a thin, pliable material used as a filter or barrier, are attracting growing interest because of their ability to meet the ever-increasing regulatory requirements of municipal water systems.

Slides 8 and 9 illustrate two of EMCOR's membrane water treatment projects currently under construction. Photographs on slide 8 show the Palm Beach County Water Treatment Plant Number 9.

This new plant has capacity of 25 million gallons per day of clean water production, free of the dissolved solids, salts, and discoloration that frequently impair water quality in this area. Our pooling camp subsidiary, the prime contractor on this important project, will install and oversee the entire membrane softening process train and associated structures.

Slide 9 shows features of the Glades Road Water Treatment Plant in Boca Raton, Florida, another community in Florida experiencing water problems.

This large project, scheduled for completion in May 2004, involves the installation of a 40 million gallon per day membrane softening facility on the existing city of Boca Raton's treatment site. The photograph shows the size and scope of this major project, designed to meet a critical need for years to come.

At EMCOR, we think that our investment in Pooling Kemp will provide us with continuing access to a growing market as more and more communities and private factors are forced to deal with increasing water regulatory problems.

What is the future for EMCOR as a whole? We can certainly draw confidence from our backlog of high-quality construction and facility service contracts. We passed an important milestone when our U.S. facilities service division moved into profitability. And as shown in slide 10, our balance sheet remains significantly underleveraged.

Although EMCOR management policy could be described as fairly cautious when it comes to debt, we feel that there is a time and place for perfectly structured and reasonable amounts of leverage. This is particularly the case when opportunities exist to acquire high-quality assets at reasonable prices, a situation which exists today.

Accordingly, we recently announced the establishment of a new, $275 million revolving debt facility, replacing a smaller facility, which would have expired next year. This five-year agreement, with a group of 10 lenders led by Harris Bank, has been rated twin triple b-minus by Standard & Poors and allows for $200 million of equal ranking senior debt.

With this debt capacity and our continuing liquidity, we intend to continue our pursuit of attractive investments at prices which will enhance our returns to our shareholders for years to come.

That's the story of an excellent third quarter. And now it's time for your questions or comments. The operator will give you instructions on how to queue to ask questions. And I thank you for your interest and for your support.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. One moment please for your first question. Your first question is from Mr. Alexander Rigell with Freedman Billings Ramsey & Company.

Congratulations on another great quarter. I guess I could ask you things like your internal growth, your expense control, which I was surprised at, especially at the corporate level, or even facility services which I've been hounding on for probably years now.

But I want to ask you some questions that I think are probably on the minds of a lot of people these days. And it's got to do with number one, your pension benefit obligation and number two, in the 10K you talked about a $14 million equity investment with your venture with Baltimore Gas and Electric. And number three, there is a new legal disclosure. So, if you could go through those three bullet points and I have a couple of follow-ups.

Sure. It's always dangerous to ask me financial questions. So I'll talk about the pension question. And then Mark or Leicle can jump in.

First of all, I think that the prevailing concerns in the market are about two aspects of corporate pensions. First of all, the extent to which corporate operational results have been affected in any way by the performance of pension funds, and secondly, the funded status of said pension funds.

With respect to the first issue -- that is, the impact of the performance of our pension plans on our income statements, I can say unequivocally that there has been no impact whatsoever upon EMCOR's historical results as a result of our performance plans. They are not a factor in our PML.

With respect to our funded status, only in one area of our company, that is in the UK, do we have the defined benefits plan. All of the rest of our pension plans are defined contribution plans, so the question, as I understand it, is largely irrelevant. In the UK, as obliged by -- I think it's Fasby 87.

We performed the appropriate year end review of the funded status of the defined benefit plan last year and found it to be adequately funded. We'll be performing the same review, of course, at the end of this year.

And I can't speculate on the result, but I can say that whatever the result is, it will have once again no effect on P&I. Does that get to your question with respect to pensions?

Yes. That's perfect.

Okay. Thank you. The -- Leicle?

No, that's fine.

Shelly, would you like to have a word about the legal disclosure that is new this quarter?

Yes. As we indicated in the queue, this is relatively new we were just brought into, although it's been pending for some time.

Basically, it's a nonunion sheet metal contractor who has been complaining that mechanical contractors would not hire him, suggesting that the unions were putting pressure on mechanical contractors not the hiring of nonunion subcontracters.

We've just been brought into the case. Heritage, our union sheet metal subcontractor and some other subcontractors, and we're looking into it.

We have not yet answered it. We -- there's been a large amount of discovery in this. We have yet to evaluate all of it and examine it. So I wouldn't want to make any predictions about the matter. It would be just inappropriate at this time.

It looks, though, substantially a complaint involving the unions. Union, versus nonunion. But as we examine it, if anything more develops, we will obviously update our information on it. There is a scheduling conference with the judge scheduled in the next couple of weeks, and we'll have a better idea as to what the schedule for this will be. But at this point, it's a little too premature, Alex.

Thank you and with regard to the venture with Baltimore Gas and Electric, can you talk a little bit about that and what was the catalyst for the $14 million investment in quarter?

Yes. The $14 million investment to was to replace a credit line that was on the verge of expiring. While we were on discussions with Constellation, the new name for Baltimore Gas and Electric about financing for this project.

This is a project I've talked about from time to time on previous calls. It's an interesting one involving our joint ownership with Constellation, of a system in downtown Baltimore, that creates ice, which is super cooled kind of slush, which is then pumped around the Baltimore city core to various buildings to support their air conditioning systems.

It's a strategically important operation for the utility and we are an important part of the ownership of the system. This is a position that we inherited in conjunction with our cooling kemp acquisition in 1998.

So we're in discussions with Constellation about longer-term financing for this long-term asset.

Great. And two more questions. Number one, with regards to the UK, I suspect that your profitability this quarter has probably held back, given that you were just starting in ramping up the new rail project. Is that correct? Would you expect profitability in the UK to accelerate over the next couple of quarters?

And secondly, I suspect almost the same out in Las Vegas. The wind project, I believe, is going to break ground any day. Can you talk about that? Can you talk about the timing and magnitude of that project, given that it should be a two- or three-year project.

Yes. You are correct with respect to the UK. The UK profitability in this quarter was disappointing from the construction side.

Although -- and this is interesting and fresh evidence for the validity of the EMCOR model, UK facility services were nicely profitable again this quarter, showing their counter cyclical characteristics as compared to the construction market which was not good in the UK at the time.

What Alex was referring to in connection with new projects was the major awards that our UK company has received in the rail construction that is associated with the channel tunnel rail link. This is the high-speed rail system that will connect the city of London to the British coast and to the tunnel.

At present, those trains run at normal, across-country speeds before connecting to the high speeds at the tunnel in France. In the next several quarters, we will see a ramping up of the revenues and I expect the profitability of the UK construction operations, as these rail projects, which we were only recently awarded, begin to contribute significant revenues to our operations, so we're optimistic about the UK.

In Las Vegas, once again, Alex is correct. We are seeing a resurgence of casino and hospitality-related construction after a hiatus for probably a year or 18 months. The Mandolay Convention Center recently resumed construction. And the wind project is a major new project on which we are already active.

I can't disclose details with respect to the size of the project, Las Vegas developers are notoriously private about this sort of thing. But it is certainly a significant asset for us.

Thank you very much. Nice quarter.

Thanks, Alex.

Your next question is from Mr. Michael Roseler with EJS securities.

Hi, Mike.

Hi. First of all, you mentioned pursuit of opportunities in this current environment, were there any expenses in the current quarter, related to that, considering you don't have an M&A team?

Yes. There are almost always expenses with respect to M&A activities, and there certainly are in our current quarter.

EMCOR's -- Mike points out something that listeners should know and that is that we don't have a mergers and acquisition team. M&A is not a central part of our business. We're an operating company.

But when we see interesting and correctly priced opportunities, which we do at present, as a result of a number of companies under pressure, we form task forces, if you will, composed of operating professionals, whose job it will be to run the resulting acquisitions, if, in fact, it's successful. So we think this is good discipline for us. And it means that operating professionals are looking at any opportunity that comes along.

There are incremental SG&A expenses associated with this kind of activity and the M&A related expenses in the third quarter, which did elevate SG&A slightly, it would be contained in that SG&A account.

Okay. So next to look at your backlog here, you've talk busy this change to slower-burn projects, can you give us maybe a sense of, say, the average time in your backlog now, in terms of the length of a project that's in your backlog?

That's a very complicated question. Simple to ask, complex to answer. At any given time, our portfolio of projects probably numbers between 2500 and 3,000 projects.

And you are exactly right in saying that the macro trend, away from relatively faster-paced private sector construction projects towards slower-paced, public or qualified public sector construction projects, has resulted in an extension in the -- of the mean duration of our projects, by some measure.

We used to say that the mean duration of our projects was 6 to 9 months. And I'll pause and say that that should indicate to the listeners that EMCOR still remains a small project-oriented company. That is the way to achieve stability and consistency of revenue performance, in our view.

So only about 20% of our revenues, for example, are derived from that.

As a result, a major factor in our good performance notwithstanding recessionary trends on the economy because many of the projects that we perform are under the radar in terms of customers' capital expend tur constraints.

It is certainly true, however, that these projects that have significantly increase said our backlog in recent quarters to its current record level, in many cases, produced less revenue per unit of time than was the case, for example, a year ago, when we had a portfolio, fast-pace the telecommunications type project.

So if I had to guess, Mike, and it's only a guess, but perhaps an educated one, I would say that the mean duration of our projects has gravitated towards the upper end of that 6- to 9-month mean duration, as opposed to the lower end perhaps a year ago.

Well, then, what's the implication in terms of operating margins from that change?

No implication to be gained from that, I don't think. The -- a long-term project is easier to plan if we are sufficiently in control of the scheduling. And that is the -- that is the key. I don't think there is a conclusion that can be reached concerning margins.

This quarter, of course, notwithstanding the fact that we are performing a portfolio of projects that is represented by what you can see in the backlog bar charts, gross and net margins were up nicely.

Part of that has to do with the significant turnaround in a facility services, of course. But I think the numbers suggest that there has been no tradeoff in terms of either gross or net margins. It's hard to say, but that -- there is anecdotal evidence of that effect.

This leads into my next question, which is have we seen the full potential and impact on P&I from services and from the potential from comfort systems acquisition, particularly the purchasing benefits they've talked about in the past?

It's hard to speculate about either one of those. We're very happy with the process of integration that we've experienced at Comfort Systems. And I alluded to one prospect of back locks in contract, in the quarter.

One, is playing a joint venture on a project in the northeast. And there are other examples of that kind of cooperation and participation. What Mike is referring to with respect to purchasing is an allusion that I've made on previous calls to the fact that the Comfort System is companies.

And I'm going to stop calling it that soon because they're getting less like Comfort Systems and more fully integrated into EMCOR. One of their assets was their strength at centralized purchasing and getting the best deals all around the country, including rebates from major manufacturers of the materials and products that we install.

And we had things to learn from them. And we are learning from them. And we are improving our purchasing as a consequence. We think that will be a continuing benefit to us. My own guess is that we will proudly see an enhancement of that in the fourth quarter and in years to come thereafter.

And just a final question, circling back to the acquisition idea. You know, everyone is aware of sort of the weakness in some of your other competitors.

Can you give us maybe a sense of the size of an acquisition? Is there something available? I know your part towards unionized companies. Are those opportunities out there?

Yes. There are opportunities out there. I think that the current weakness of Encompass Services is common knowledge. There may be implication that they may file for reorganization.

And I think it's also well known that within the organization there are unionized subsidiaries, some of which we were the unsuccessful bidders for at the time they were acquired by for higher prices. I mentioned a moment ago that we do not have an M&A operation.

Therefore, we have to take operating personnel and assign them to due diligence and other activities in the event that an acquisition or investment opportunity arises.

What that means in turn is that we might as well assign them to an opportunity worth $500 million of revenue, as $100 million buzz of the operational -- because of the operational dislocation is the same and of course the larger acquisition has a material contribution to EMCOR results.

Accordingly, I think that an operation with revenues in the, oh, 400 or $500 million range is right at the sweet spot where EMCOR is concerned ask we are certainly capitalized with debt capacity to make one or more investments of that type.

Okay. Thank you.

Pleasure.

Your next question is from Mr. David Cohen with Fairlawn Capital.

Hi, David.

Good morning. Great quarter. I was wondering if you could talk about overalls that are down but a change in accounts receivable. Billing in excess and liability is up. And you talked about the net overboard. I don't understand that. If you could just explain that, too.

All right. Let's let -- -- Leicle do that.

You'll notice the accounts receivable have received a majority of that increase came from the acquisition of Comfort. But the receivables overall have gone up as well.

But offsetting that, as you pointed out on the liability side is our ability to build out ahead, which we've had a substantial increase of $70 million from last year, which rolls out into these projects earlier. Some of them gets into receivables quicker. And you get paid on a timely basis.

But as you can see from the overall net position of the receivables and net billings, we're pretty pleased with where we're at. As we've indicated, this is the time where we've worked heavily on those projects throughout the area. And we will be using working capital on those projects.

David, in a nutshell, we find for various reasons, seasonal, customers, budgetary cycles and the like, that we have proportionately more project startups in the beginning of the year, proportionately more project wrap-ups at the end of the year. And the macro pattern for our working capital is that we are net investors of working capital in the second and third quarters of the calendar year and we recoup our capital investments in the first and the fourth quarters. So that is what Leicle was talking about in evolution.

If you could just talk about net overboard, if you could explain what you meant by that?

Sure. You have billings in excess of cost. And on the asset side, we strive to make sure that billings in excess of cost exceed cost in excess of billings by the largest part because that reflects that we are able to invoice our customers for costs that we have not yet sustained.

Thereby enabling us to play at least with a portion of our customers' money when we're financing our projects. And the number that I reported, $167 million, if memory serves, is the extent to which billings in excess of cost, liability exceeds cost in excess of billings.

Great.

It's a quick and dirty method I've been using for years of measuring the effectiveness and sophistication of our contract writing, and the extent to which we can get our customers help us finance projects.

And has something change said that's improved it over time? Can the trends continue?

The trend it's -- this number fluctuates annually and quarterly it's at a high right now. We're particularly pleased with it. And it has contributed significantly to our unexpectedly good cash position at the end of the third quarter.

It reflects a policy that EMCOR has had in place for the last eight years, which is to maximize liquidity at all times and one of the best ways of a company in our business to maximize liquidity is to be very aggressive and very clever in the way that we write our contracts and entitle ourselves to payment from our customers.

That's great. Thank you very much.

You're welcome.

Your next question is from Mr. Jeff Beech with Stifle Nicholas.

Good morning.

Good morning, Jeff.

Can you explain in this third quarter versus the last quarter, electric margins in the U.S. jump over 200 basis points, mechanical go down almost 200 basis points and then, typically, as you were talking about, projects start up in the spring wind down in the fall and that's generally when you book high-profit margins, particularly in the mechanical sides. What's the outlook in the fourth quarter? Are we going to see a rebound back to normal levels?

We see -- Thank you, Jeff. We see various fluctuations -- fluctuations within and between quarters base said upon project closeouts. We will, from time to time, have major projects that close during a quarter on an unexpectedly positive -- or occasionally negative basis. And these have the ability to impact gross and net margins to a significant degree from time to time.

I wouldn't put too much emphasis on the individual variations, unless they begin to show a trend. I would remind you that these margins are occasionally materially affected by another revenue and profit recognition policy that EMCOR imposes upon ourselves. And that is that we don't recognize income on a project until it is at least 20% complete. This is for the purpose of conservativism in our accounts.

We don't have to do this, but we chose a long time ago to do it, in order to help avoid surprises of the type that you don't like and we don't like. At the end of last quarter, we had a number of practicals that was within that category, of sub20% completion and accordingly not contributing anything to income at that time.

So I didn't see anything -- I saw the same numbers that you did, and I didn't see anything that was troublesome for me in terms of ongoing trends.

On the mechanical side, then, is it largely due to new project startups as opposed to one or two large projects that may have underperformed?

I think it was probably due in large part to new project startups on the mechanical side.

Okay. A couple of other things. On the facilities services, this big jump into profitability, have you reached a point now where you're at this critical mass, and as revenues build, there's leverage, and you can look to higher margins, and what is a possible margin range or goal that you might have in that business?

Well, that's a very helpful question because it gives me the opportunity to speak for about 20 minutes on the development of facility services. But I'll try to keep it to a half minute or so.

The market for facilities services in the United States, I believe, is enormous. I say "I believe," because this is a new business. It does not exist, or at least did not exist until EMCOR created it.

Historically, aspects of facility service have been provided by the manufacturers at control systems, like Johnson controls, and occasionally by divisions of the property companies, Curbman Wakefield, CB Richard Ellis and the like.

In 1998, we established a broad relationship with CB Richard Ellis to take over responsibility for the technical services operations within that company, indicative of the fact this the property companies don't have the technical services resources that we do to perform this work.

Now, the model for EMCOR's facilities services business in the United States is our British operation, which has been one of the strongest in the UK for nearly 15 years. And, as I mentioned earlier in this call, it has shown that it is counter cyclical to construction, thereby showing a nice balance between the cyclical operations and our desired, stable consistent performance for EMCOR.

So we began to build facility services and delivery capability in the United States in 1996. And we have been expensing our costs all along as we have been building the infrastructure and back office and everything necessary to promise customers that we could provide high-quality services across the country.

We have now, as you suggest, reached that critical mass, and the recent award from Bank One was indicative of exactly that, that they gave us responsibility for all 2,200 of their locations across the country, of which we provide high-quality technical services on the basis of absolute integrity and continuing attention to these critical assets for them. And I think that the -- this is a business in which we have very few, if any, effective competitors right now.

The only estimate that I have seen in the size of the business in the United States is that there was about 380 to 400 million dollars of business done in this last year. So market share is certainly not a limiting factor. And our long-term experience of profitability with facilities service is that it is more profitable than construction in a parallel market, generally speaking 10% or so more profitable.

Great. One last thing, current pace of activity in electric power projects and outlook there, is it changing because of the difficulties of some electric utilities?

I understand that it is. We are not heavily involved in the central plant, electric power generating market. We do have participation in a few practicals, but it is not a central part of our business.

We are much more interested in smaller plants, combined generating centralized chiller plants and the like. In fact, most of our energies in the energy sector go into the consumption side of the energy transaction. Certainly, that is to say the retrofit for the owner and users.

And that's really what I was specifically addressing. Has there been any change in the electric power projects, the smaller ones that you addressed? The chillers? The [INAUDIBLE] plants?

We've had continued success in acquiring those projects. I don't think we announced any new awards this quarter, but they continued to be an important and very profitable part of our business, typified, for example, by the center plants at Dulles Airport and Miami Airport that we have been working on for the last year or so.

All right. Thanks.

Pleasure.

Your next question is from Mr. Steven Metcalf with CSFB.

Good morning, gentlemen.

Hi, Steve.

I have a question regarding the backlog, how that burns off. You spoke kind of how the project are at the end of that 6 to nine months. What area of business kind of in market that you serve would shift that back?

And obviously you mentioned telecommunications has been a fast track. You know, assuming that's probably not going to come back soon, whoo area would we look for kind of to accelerate that to more of the six month?

Well, there are two factors in thinking about the contribution of backlog. First of all, to directly answer your question, you would have to see a resurgence of confidence in the private sector construction market. Notably commercial construction. Right now, we're seeing continued caution on the part of owners or end users of both. High-end commercial and industrial space. We're seeing maintenance Cap Ex, which is fine with us. That's good business for us.

But we're not seeing much, if any significant investment in new capacity at the high end of the market, which is what we're interested in. Either in commercial buildings or in industrial facilities.

So that's where you'd have to look to see the -- a reversion of the mean duration of projects back towards the six-month end. But I need to use this opportunity to remind you and other listeners that there is a large quantity of revenue derived by EMCOR that never sees the backlog chart.

We omit most projects under $250,000 from our backlog report just because they work in and out of our portfolios so fast that they don't catch the backlog report. And this proportion of our business accounts for typically between 25 and 30% of our overall revenues.

So any discussion of the evolution of backlog, as it were, has to take into account this major number that is off the page when you're talking about both mean duration of projects and contributions of backlog to revenue.

Okay. I guess what I was trying to get there is an idea of things to look forward when we might see, you know, revenues growing at, you know, higher rate, if there were any specific, you know, segments of the backlog, like I said, if telecommunications were to, whatever, come back.

You know, I was thinking that then we might see revenues grow a little faster than we would have, assuming, you know, these maintenance cap, projects come on. Is that a fair assumption?

It might be. Although our organic revenue growth this quarter, year-over-year was 6%, which, in a company of this size, on a long-term basis, is in my view pretty good performance, particularly in this market. And it's possible we will exceed that. We have exceeded that historically by a substantial market.

I think that our organic compounded annual revenue growth year-over-year for the last five or six years is in the 10 or 11% range. But I don't think that -- I think that's one of those statistics, which, if extended for 100 years or something means we'll be doing all the work in the world at that time.

So I don't suggest by any means that that type of a compounded growth is sustainable. I think mid-single digits is what I would bet upon long term for this company.

You're right that if there is a resurgence of confidence in the private sector, commercial and industrial markets, and if we're already turning, I don't know, five% or 6% organically, which we did this quarter and maybe there is room for improvement.

-- all right. And then you mentioned secondary strength in transportation, education, and infrastructure.

Have you seen state budget constraints on other conscience calls, other companies we've heard people pinpoint this as an area of concern and I just wanted to know if it has any effect on projects that you've been awarded or that you're working on being stretched out or decisions on the new awards being stretched out?

The -- it's hard for me to speculate on what other calls you've listened to, and you should keep in mind an earlier comment of mine earlier that an early portfolio embraces 2500 projects at any particular time. So it's not likely any particular project will have an impact.

Notwithstanding that, I would say we have had no significant deferrals and cancellations and certainly no material ones of any consequence. And I think that one of the reasons for that -- and this is only speculation, but maybe informed speculation -- is that the systems that we install and the portions of these projects, in which we get involved, typically are performed after a lot of the money has been spent.

That is to say the hole has been dug, and it's been filled with concrete and the steel has been put up, and the glass is in. And then the systems begin to be installed. So projects have a good deal of momentum by the time we get involved in them, as opposed to cancellations at the engineering or design or even at the excavation stage.

All right. Thank you very much.

You're welcome.

Your next question is from Mr. Raymond Ching, with Lehman Brothers. Good morning, guys. Congratulations a good quarter. Just to follow-up on your -- congratulations on a good quarter. Just to follow-up on the backlog and revenues. How much of the revenues this quarter were. In the backlog?

That's a really difficult question. Both our finance guys in the room are shaking their head.

From our standpoint, the majority of it, except territory stuff less than 250 would have rolled through your backlog, so your revenue typically does roll through there, and then it's replaced by a new work.

Right.

Like I said, the items, generally less than 250, you don't catch it because you catch it on a particular date, would not roll through there. But the majority of the contracts you have are sign said and do run through there. And then they're replaced on a periodic basis as we roll forward.

Let me try a little math, and this is when Leicle really goes pale. We had $1 billion for the quarter.

Right.

We'll say for discussion, because I think there's been a little bit of a rundown in very small project volume. Let's say that 25% of our revenues this quarter were attributable to projects under 250 million. That would mean quick and dirty that backlog contributed 750 million to revenues in the quarter. Are you okay with that, Leicle?

Yes. Absolutely.

So do you have the number for the operating cash flow number and Cap Ex for the third quarter?

Sure.

Capex, we're right at $12 million. And let me look up the operate ago -- .

For the year-to-date.

For the year-to-date. Okay. And the operating cash flow for the year-to-date carried for the -- forward was 90 million. Did you get that?

90 million dollars for nine months end said? -- ended?

Right.

And can you give us a eligible -- general sense of your overhead? How much of your overhead is fixed for the operations?

The majority is labor that runs through there. All right?

Okay.

Labor that supports the ongoing activities. But the fixed component would be definitely less than 50%. Don't have the exact figure. But the majority of your costs that you spend have to do with the labor that supports the operation.

Okay. And the fixed component primarily would be for first? Like office space or is there any other component?

Yes. That's right.

Okay.

Equipment and that sort of thing which you have already purchased.

Right. Okay. Excellent. Thanks very much.

You're welcome.

Your next question is from Mr. Louie Toma with Boston Partners.

Hi, guys. Just a couple of questions. Can you give us a sense for how much of your revenues is from recognizing revenues through the percent completion?

Nearly all of it.

Okay.

But that is the method that we are required by GAP to utilize.

Okay. And what was your operating cash flow last quarter, this quarter?

The operating cash flow for the nine months was the disclosure in 10-Q was 90 million dollars.

So for the -- $90 million for the nine months? So for the quarter would be what?

Just over $22 million.

Okay. Can you -- for this quarter, what were the margins on your contract work?

They were 3.4% debit. And if memory serves, 12.3% gross margin.

Well, I guess I'm not looking at gross margin. I'm looking at in your 10-K, you have -- you disclose what your costs are in your uncompleted contracts and then you have your estimated earnings, and then the sum of that is your total revenues.

And that -- so that's the contract margin that I was referring to, which I think last -- in '01, it was around 9.25%? Do you know which ones I'm -- do you know which numbers I'm talking about?

I'm pretty sure that Mark Pompano knows what you're talking about. Mark, do you want to try?

Yeah, it's a difficult question to answer because if you look at our segment disclosures in our public filings, there is something that is inherent both domestically and internationally. So to provide that, we would have to go through pretty rigorous exercises of reallocating overhead costs.

I see where you're going. What he's referring to is just as an example, we have a New York-based mechanical company which is classified as construction when in fact half of its business is facility services.

We just made a decision, a labor-saving decision some years ago that it just did not make any sense in terms of commitment time to make an analysis of what the portion of the business was on one side or the other, particularly since there is no broad black line between them when you get to the difference between a small task construction as oppose said to recurrent facility service. So we made an arbitrary decision that has resulted in gray areas. And that's what makes your question a little difficult to answer.

Okay. I see what you're saying. Let me ask you this. In 2001, the implied margins on these contracts that's in your k was 9.2% and in 2000, it was 6.75, 6.8. So a good-sized jump. Do you have any insight on what -- on you know, what that's a result of?

I don't recognize the numbers that you're referring to and neither to Mark or Leicle.

I'll tell you what I'll do, in order to not take time on the call, we'll -- would you call Mark Pompa, please, in our office this afternoon? And he'll be delighted to take you through it.

I sure will.

Okay. Thanks.

Your next question is with Matthew Hart with Merrill Lynch.

Hi, guys.

Hi.

Couple of quick follow-ups on the Encompass questioning. I was wondering if you guys noticed any benefits in terms of your business from their financial distress? That's the first question.

Second of all, considering the fact that the company is looking to do a pre-pack very shortly, I was wondering how realistic it is that you might be able to pick up some of those assets, either pre or post filing?

Thirdly, I wanted to clarify whether or not you had any interest in nonunion businesses? And lastly, just short of what you think is going to happen with that situation, what the impact is going to be on the industry and on your business in the future?

Okay. Quickly, in connection with each one. With respect to benefitting from their distress -- let me say at the outset that I don't take any pleasure or joy from the distress of anybody in our sector. This is a tough business, and I would like everybody to be prosperous. I don't think that we could say that we have inherited any tangible, at least material benefit from their problems so far.

It is, of course, axymatic that a company with highly-publicized financial weakness will have difficulty selling its services, particularly on a long-term basis.

So it might be that companies looking for a long-term service relationship or commitment to a large-scale, long-term project in the future will have -- have an easier time choosing an EMCOR company. Let me put it that way. No, I don't think we've inherited anything tangible, at least so far.

We are interested in certain assets of Encompass, and we will be watching that situation with interest to determine if such assets become available. I mentioned earlier that we were, in fact, outbid by Encompass for certain of those aspects back in the '90s when we thought prices were too high and as it turns out, we were probably right.

With respect to our appetite for nonunion aspects, certain aspects of the facilities services business are performed predominantly nonunion. And we are considering whether whether or not -- considering whether or not we should be looking at some expansion of our capacity in that area in order to help to expand our facilities service delivery capabilities.

But our interest in expansion, especially in the construction sector, is predominantly union. And in general, with respect to the impact of the difficulties of encompass on the sector, we have not considered ourselves a direct competitor of Encompass for a long time.

That is because first of all, we regarded them in the rollup model, whereas EMCOR is not. Secondly, they're predominantly nonunion in the South. So we very seldom compete with them head to head. And EMCOR's model, particularly our diversity model and the role of facilities service in our revenues is not replicated at Encompass.

So whereas we regret their difficulties and wish that they were doing better, I don't think that their problems have anything to do with what EMCOR is experiencing.

Great. Thanks a lot.

Okay.

Your next question is from Lou Sykes from Pennant Corp management.

My question has been answered. Thank you.

Okay.

You have a follow-up response from Alex Rygell with Freedman Billings & Ramsey.

Hi again, Alex.

Hi. Quick question. Were there any associated with your revolving credit agreement?

Leicle says no.

The fees that you incur are amortized over the life of the revolver.

Beautiful. Thank you very much.

Okay.

Your next question is from Jeff Allen with Silver Crest Asset Management.

Hi, guys.

Hi, Jeff.

I was just curious, was there any impact, positive or negative from sort of project profit catch ups in the quarter? And more broadly, does that, you know, typically have any noticeable impact in any given quarter?

By that term, I take it that you mean projects performing better than anticipated. There is always a tendency on the part of the project managers faced with the many uncertainties that it is their job to manage to recognize revenues and particularly income, net of appropriate reserves, reflecting those uncertainties.

So projects are continually being reassessed from the standpoint of the, of their actual cost and actual anticipated cost to complete, reflecting these various assumptions. And inevitably, in any given quarter, some projects are improving, and some are not. Some are deteriorating.

So I think it's fair to say as a blanket statement that in every quarter, you have revenues and profits reflecting some project catch up -- and I hope I'm understanding your question correctly, but that it's always net of projects that are moving in the other direction.

And once again, without trying to beat this horse to death, we're talking about an extremely large portfolios project here. So inevitably, you're going to have movement in both directions.

So in essence, you're saying just because of the granularity of your project, no one project would have a noticeable impact.

Yes, that's right.

Okay.

I think we're talking about the large numbers here. And it's an important aspect of EMCOR's numbers and stability our revenues, very large number of individual portfolio items.

Okay. Thank you.

You bet.

You have a follow-up response from David Cohen with Fairlawn capital.

Quick follow-up. I just wanted to go to the question of organic revenue growth. You mentioned 6% this quarter. If I'm correct, it's been improving over the year, first quarter with the week, second quarter better, and third stronger. I was wondering if you could comment on organic revenue growth trends?

Yeah, I think we saw the first and second quarters showing -- and I'm going back to my memory now. I think the first quarter was off 9% over the year-ago quarter.

And in all of these comparisons, you've got to keep in mind what we're comparing the quarter to. The first quarter of 2001 was still replete with Telecom projects, which were really flying. And in fact, we were closing out a lot of Telecom projects at this time. -- at that time, and they were really tearing along.

So I was not at all surprised that our first quarter reflected the decline. And I think I'm right in that the number was 9%.

The second quarter shows an improvement but still a decline, if memory serves. A very modest one. 1% to 2%, if I remember correctly.

This turnaround that we reported this quarter was encouraging, although it was substantially associated with the Canadian, and I think the UK operations, reflecting the contribution that we get from the diversity of our geographic performance. So we're still seeing, number 1, caution in our U.S. customer base, in terms of fast track projects in particular.

And secondly, we're still comparing those revenues to relatively strong revenue numbers in the third and fourth quarters. But overall, yes, the pattern has turn said around, David, and after two quarters of organic revenue decline, you're seeing a return to growth.

Do you have a view of long-term organic growth, revenue growth?

Well, yes. I -- I think that my position for -- now for several years has been that although we have exceeded 10% in organic revenue growth compounded over the last five years, there is no way that I expect that to continue.

And I think that if we grew at 5% or so per anum for the foreseeable future, I'd be well pleased with that, because I think that's what companies of our size and our business can feasibly be expected to do.

Thank you very much.

It's a pleasure.

There are no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

As always, everyone, I appreciate your interest in and your support of EMCOR. Watch this space for interesting developments. Thanks again. Bye-bye.

Thank you, Ladies and Gentlemen, for participating in today's conference. This concludes today's call, you may now disconnect.