EMCOR Group Inc (EME) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group 2010 first quarter earnings conference call. (Operator instructions.) Mr. Eric Boyriven of FD, you may begin your conference.

Thank you. Good morning, everyone, and welcome to the EMCOR Group conference call. We're here to discuss the Company's 2010 first quarter results, which were reported this morning. I'd now like to turn the call over to Kevin Matz, Executive Vice President, Shared Services, who will introduce management. Kevin, please go ahead.

Thanks, Eric, and good morning, everyone. Welcome to EMCOR Group's earnings conference for the first quarter of 2010. For those of you who are accessing the call via our Internet and our website, welcome, and we hope you have arrived at the beginning of a slide presentation that will accompany our remarks today.

Currently, everyone accessing the slides should be on slide one, which is the EMCOR title slide. During the call, instructions will be given for you to advance to another slide. So, let's do it now. Please advance to slide two.

Slide two depicts the executives who are with me to discuss the quarter's results. They are Frank MacInnis, Chairman and Chief Executive Officer, Tony Guzzi, President and Chief operating Officer, Mark Pompa, our Executive Vice President and Chief Financial Officer, Mava Heffler, Vice President, Marketing and Communications, and our Executive -- excuse me, and our Executive Vice President and General Counsel, Sheldon Cammaker.

For call participants who are not accessing the call via the Internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under Presentations. You can find us at emcorgroup.com.

Before we begin, I must remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR's management's perception as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance.

Such risks and uncertainties include but are not limited to adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business conditions, increased competition, mix of business, and risks associated with foreign operations. Certain of the risks and factors associated with EMCOR's business are also discussed in the Company's 2009 form 10-K and its 10-Q for the first quarter ended March 31, 2010, which was filed this morning.

So, with that said, please let me turn the call over to Frank. Frank?

Thank you, Kevin. I think a lot of the audience doesn't realize that English is your second language, so congratulations on that effort.

Good morning, everyone, and welcome to our 61st regular quarterly conference call for investors, analysts, and other friends of EMCOR Group. Today's call is being conducted, as usual, by telephone and by simultaneous webcast. And I'll be referring from time to time to a slide number to identify the relevant slide for webcast participants. Right now, we are still on slide two.

The focus of today's call will be on the 2010 first quarter earnings press release and form 10-Q that we issued and filed earlier this morning. We'll conduct this call in our customary way. First, a discussion of the highlights of our first quarter operating results, including a breakdown by segment and my comments on our quarter end balance sheet. Then, I'll discuss the evolution and the current status of our contract backlog portfolio with special emphasis on end market sectors that we believe will be key to our continued success.

At that point, I'll turn the call over to Tony Guzzi, our President and Chief Operating Officer, for his analysis of some recent and notable contract awards from our broad and diverse customer base, followed by some additional comments on opportunities for organic and transactional growth as our industry emerges from a broad and deep recession.

Finally, I'll talk about some of the major factors that we expect will influence EMCOR's performance during the remainder of 2010 and into 2011 amid changing market conditions that will require nimble and decisive management. Following my guidance comments, there will be an opportunity for participants to ask questions or to make their own comments, and you can see from slide two that a number of EMCOR's senior officers are here to help me with the answers.

So, let's begin. Please go to slide three. I'm pleased to report that the first quarter of 2010 was our 59th consecutive profitable quarter, despite recessionary and seasonal pressures on revenues and margins. Although performance paled in comparison with our all-time record results in the first quarter of 2009, our operating segments performed in steady fashion as many of our markets searched for a bottom.

On slide four, we identify some highlights and details from our first quarter results. Revenues declined 13.1% from our record 2009 first quarter to $1.2 billion, due in large part to continued weakness in construction activities in our US commercial and gaming and hospitality markets. Our US facilities services segment revenues declined 8.4% year-over-year, while our Canadian and UK revenues collectively were roughly even with 2009's first quarter.

We don't often cite gross margin as an indicator of revenue quality, but it's perhaps worth noting that 2010 first quarter gross margins were 13.6% of revenue compared with 13.9% a year ago. General and administrative expense declined $5 million year-over-year, but increased as a percentage of revenue. We're very pleased with our successful reduction of overhead charges and headcount over the last 18 months, although we always regret the departure of talented employees and hope to have a reason to invite them back very soon.

2010 operating income was $42.3 million, or 3.5% of revenues, down 34% compared to 2009. As shown in the segment performance schedule on slide four, margins declined in US electrical, US facilities services, and Canada, while margins advanced in US mechanical and in our EMCOR UK subsidiary. Overall, operating income margins declined 110 basis points compared to the 2009 record first quarter.

Please go to slide five. First quarter net income was $21.8 million, or $0.32 per diluted share, compared to $0.55 per diluted share a year ago. 2010 income was net of income taxes of $17.5 million, or 44.5%, of pretax income due to a combination of circumstances. We expect a tax rate of 39% for full year 2010.

Net income was also inclusive of $2.4 million of net interest expense compared to $0.3 million in 2009, due in part to the inclusion of expenses associated with the acceleration of previously capitalized debt issuance costs arising from the repayment, termination, and replacement of a term loan and a revolving credit facility as previously announced.

Operating cash flow was a negative $79.1 million compared to a positive $12 million last year, marking, in my opinion, the effective conclusion of the de-capitalization, as I call it, process that occurs naturally when falling revenue levels cause working capital to flow in cash. Reduced quarter one 2010 net income was also a contributor to the comparative cash flow performance.

We are pleased with our first quarter performance despite the inevitable negative comparison with 2009's record performance, and we believe that our business segments performed steadily in a challenging period in the business cycle.

Please turn to slide six. Although EMCOR's balance sheet cash was negatively affected during the quarter by the operating cash flows previously discussed plus the utilization of $45 million of cash for the repayment of a term note and the routine payment of cash taxes and incentive compensation, quarter end cash was nonetheless $601 million, total debt was $151 million, and our ratio of debt to total capitalization actually declined year-over-year to 10.73%, well within our comfort zone and illustrative of the dry powder that we retain for opportunistic investments and for recapitalization of our contract portfolio as business and backlogs improve.

Please go to slide seven. Backlog did improve sequentially in the first quarter, rising $140 million, or $4.6%, from year-end levels to $3.29 billion. Backlog increased in almost all of our seven major end markets with only the troubled gaming and hospitality sector reflecting a continued decline. Notable in terms of both actual and percentage growth were healthcare, which continues to be our largest end market in backlog terms, commercial, which rebounded from its historical low at the end of 2009, institutional, reflecting our continued growth in government services as government spending and the stimulus program ratchet up, and water and wastewater, a reliable, demographically driven sector.

Public and public related end markets continued to comprise 78% of our overall contract portfolio, as in the preceding quarter. But, the corollary of that statement is that private sector backlog growth kept pace with the public sector markets for the first time in more than a year.

Our overall contract backlog growth, a healthy book to burn ratio of 1.12, and other fundamental indicators of stabilization and the beginnings of recovery convince me that the worst may be behind us and that we can begin to plan for gradual expansion in a number of our diverse array of end markets. Although margin opportunities and contractual risks remain less attractive than in prerecession conditions, the efforts that we have made to modify our cost structure should enable us to achieve profitable growth without immediate changes in overhead spending.

We're also encouraged by first quarter double-digit backlog growth in our Services business, which we always expected to be our leader in post-recession recovery as facility owners cautiously begin to invest in their properties again.

Now, I'm going to call on birthday boy Tony Guzzi to discuss some notable contracts awards that help to support our first quarter backlog growth. If Tony hesitates from time to time, it is because he's resisting the need to wear bifocals for the purpose. Tony?

Thanks, Frank, and they are getting closer. You're right.

As has been the case in past quarters, our recent project awards are emblematic of our disciplined bidding practices and resulting in the backlog market mix that we see now. Frank just mentioned that it is composed of more public and quasi-public work, and that's a trend we expected well back into 2008. Also as Frank mentioned, sequentially backlog rose 4.6% from year-end 2009, again, marking for the first time in a number of quarters that we've been able to see positive growth in our backlog.

I think we would all agree it's too early to state that all our market sectors are completely off their lows. We are encouraged, though, by some of the awards we'll go through because they're emblematic of maybe owners in our Services business spending money. And hopefully, the increased activity signals a more sustained trend of more normalized maintenance and retrofit spending. As we like to say, our owners shown us that mandatory can mean discretionary in the depths of what this recession's been.

And let's start with an award from our Services business. We have stated in the past that an indicator of more normal activity would be the resumption of small project and discretionary work provided by our Service company. When we say discretionary, a lot of this work is not really discretionary. Equipment's wearing out or it's grossly energy inefficient.

Again, still early, but we are seeing some activity here. And our Fluidics subsidiary, part of EMCOR Services, has won an award -- by the way, it did come from the stimulus plan -- from the VA to replace seven larger chillers and four cooling towers at the VA medical building in Philadelphia.

This is an energy retrofit project, and we are seeing more and more of these energy retrofit projects both in the private sector and in the public sector, and we think more are getting keyed up now. This hospital, which is not uncommon, has seen building infrastructure maintenance deferred over many years and has capital funding that wasn't there to replace old equipment that was inefficient and beyond its useful life expectancy.

I would expect to see more projects like this in the future. The project is an example of a commonsense energy retrofit and energy efficiency upgrade. The energy retrofit business has good long-term growth rates, in the double-digits before this recession. And as it is, was hampered by the downturn as owners pulled in capital. We expect these projects to get back on track, and we are well positioned, probably better positioned than anybody, to execute ESCO-like work, which is Energy Services Company work, either as EMCOR, but we also support multiple other energy service companies in their solution implementation.

Staying in healthcare, our Hyre Electric subsidiary will be performing the electric systems implementation for St. Mary's Medical Center Emergency Department expansion and renovation. This is the second time Hyre has worked with this Indiana-based hospital, and our scope this time will include the installation of generators, switchgear, all cabling, voice and data, CCTV systems, access control, nurse call, and code blue systems.

Going down south to Miami, our Poole and Kent subsidiary has been awarded a contract from Miami-Dade County for various construction projects within the city's South District wastewater treatment plant. A few of the projects Poole and Kent will perform are constructing a 60,000 square foot septage receiving and solids handling building, retrofitting the motor control center, providing new electrical switchgear, HVAC units, ventilation fans throughout the facility, as well as constructing a new chemical storage area with secondary and primary containment areas.

In the UK, EMCOR UK will be responsible for the mechanical and electrical systems and installation for a project for a large UK defense contractor, with whom we have had a long-term facilities services relationship. For new callers and callers that have been with us a while, they know we suffered in the UK previously.

We've worked hard to shift the revenue and really exit the more dangerous parts of the construction market. Today our business is approximately two-thirds service and one-third construction. That's a big change from 10 years ago. We restructured, grew into this mix, and it's one of the main reasons for the improved performance in our UK business.

A few of the systems we'll be installing is the traditional work we do over and over again here in North America, chilled water systems, a compressed air systems upgrade, process systems, HVAC, lighting, fire alarm, UPS card access, and data intercom.

Here in Connecticut at Yale University in New Haven, our Tucker Mechanical subsidiary will be upgrading the university's central power plant, which will include the installation of new boilers and extensive modifications to the burner, diesel generator fuel systems, and coal and piping systems.

Additionally, Tucker will be installing a new continuous emissions monitoring system as well as new emergency generators. Again, this project is being driven by both equipment upgrades but also dramatically improved energy efficiency. And this is a sign that people are now going after these projects again, which is good news for EMCOR.

Our Border subsidiary had been working at Fort Bliss in El Paso, Texas for a few years now, and it's really -- Fort Bliss is one of the receiving bases for a lot of the equipment and soldiers as base realignment happens and equipment and people come back from overseas. And we've secured a new contract to build a new 15-screen movie theater, supplementing the base's lifestyle center. And we like this base work. We like it for the Army, the Navy, the Air Force, the Marines, or any of the above.

Border's work is full mechanical and electrical and plumbing. So, they will be responsible for all HVAC and fire protection systems, bathroom facilities, concessions area, and all electrical services including lighting, fire alarm, and data and voice cabling.

And up north in Alberta tar sands at Fort McMurray, Canada, Comstock will be installing the electrical systems for Imperial Oil's new control building, in which we will be the main control and communications hub for a new bitumen recovery plant. Comstock's scope includes all of the electrical systems, conduit, feeders, underground, switchgear, fire alarm, and all lighting.

And finally here close to home, our Forest Electric subsidiary in New York will be performing electrical work at the National September 11th Memorial Pavilion at the World Trade Center in New York City. We'll be installing a three-megawatt generator for emergency power for the pavilion, museum, and other buildings built on the site, as well as all the lighting systems, fire alarm, and security systems.

In summary, many of our awards are in the growth areas we have talked about time and time again -- government, healthcare with our aging population and more demanding healthcare needs, energy, energy efficiency, water treatment. These economic, or we would say demographically driven markets, will require our services to design, install, and maintain these facilities. And maybe, just maybe, we're starting to see the freeing up of capital for owner directed businesses, which will benefit us well because we respond quickly and love the quick turn projects.

Now flipping to page nine, we've been talking really over the past six quarters about the Company shrinking as we've gone down in size in this really difficult recession. But, we've had our eye on growth the entire time we've been shrinking. We have a good balance sheet, we generate good cash in our core business, and we have market leading franchises where we compete.

And we've talked about this a number of times. We look at these drivers as both organic drivers and, we would say, investment and acquisition drivers. So, let's think about them. We always look for the opportunity to maintain and expand our construction capability and leadership. Why? We're good at it. We will grow that geography and we'll grow that through diversity of services. We've built out a fire protection business in the last five years. We were in it. We liked it. We expanded it though acquisition and organic growth. That's the kind of thing that we're likely to do.

We like to make sure that there's going to be good end markets for us to service either geographically or in the end markets. So, we started making the investments four or five years ago at least, to take advantage of this healthcare trend.

So, how did we do that? Well, we did that through investing heavily in BIM, investing heavily in prefabs, developing a robust system of lessons learned across the Company, sharing resources across the Company. We do the same thing in data centers. We do that in a number of end markets that we think are either infrastructure driven, say building out the basic infrastructure, what's going to be needed to serve the needs, but also demographically driven.

We're also continuing to invest organically and through acquisition because we're pretty good at managing a dispersed technician base. And that's not an easy task. How do you get good at it? You have great field supervision, you have great systems that monitor them whether they be GPS, handhelds, good information systems and good tracking, and really good technical training.

And we've also, more and more as we get more into government business and we get into more of these large projects, we help with design assist or we help program manage. We see that as an area that we need to grow, because it gets us closer to the owner and it gets us closer to the lifecycle of the project. And that would allow us to extend our cycle and get in earlier and end later.

So, how do you think about these growth platforms? And again, we don't think about things discretely, whether they be an organic growth platform or an investment growth platform. We think about them one and the same, because we look to drive synergies once an acquisition happens and we look to grow our footprint.

How do you do a technicians base? Well, we're good at mechanical service. We have the footprint. We'll look to expand the footprint. You saw us just do that with schools.

Government, that's been an organic story since 2002 really, and even before that, but an acquisition that happened in 2002 that came with a small government business that we've grown significantly. And government, for us, means more than just the base operating business and the GSA. It also means all these things you've seen like Fort Bliss or what Central Mechanical was doing in Manhattan or what we do in the DC area to support BRAC and force realignment and everything else.

Fire protection we've talked about numerous times. We like it. We continue to grow it. It has a service and construction component, and a flexible union. Industrial, you've seen us make -- build on what was a pretty good industrial business we've had, but also through the acquisition of Ohmstede, Redman, PMI, and PPM, we are a fairly significant industrial player across a broad geography and groups of services. And we like that business, despite the secular downturn in the refinery business today.

And we've added other services like supplier management. We not only manage our technicians, we leverage a very large supplier base for people that have very dispersed facilities and maybe their maintenance spend wants to be a little less than what a highly skilled EMCOR technician can provide cost competitively. And we do that through our Solutions Center.

Engineering and program management we see as a way to get bigger revenue and maybe longer life programs, and therefore the margins that go with it. We think environmental is a growth area, and it would take some of the same skills we have today and apply in a different area -- material and air quality testing, water. Downstream oil and gas we've already made a business.

So, again, we think about these things not only of spending capital through acquisitions, but continuing to enhance our capabilities in organic ways. And with that, I'll turn it back over to Frank.

Thank you, Tony. We think that our established position in a broad array of strong and reliable end markets together with our conservative liquid balance sheet are a firm foundation for future organic and transactional growth.

Please turn to slide 10. In considering how to quantify our short-term growth prospects, we need to take into account a larger number of moving parts. We are gratified by the rebound in backlog terms of our commercial business during the first quarter, but think that growth will continue to be somewhat constrained in that area by both the credit markets and continued high levels of unemployment.

As Tony mentioned during his comments, the stimulus program is finally providing opportunities to acquire the sophisticated, complex projects with long-term value that are EMCOR's strong suit. We've demonstrated once again, in response to recessionary pressures, our ability to respond nimbly and decisively to the need for a modified cost structure and a lower breakeven point.

We'll continue to execute our projects and deliver our services with our longtime concentration on cash efficiency and resource leverage. And we remain actively interested in deploying balance sheet cash within appropriate limits to enhance the scope and diversity of our service offerings.

On slide 11, I reiterate our 2010 full year revenue and earnings guidance that I provided in conjunction with our year-end 2009 earnings call, that is, revenues of about $5 billion, diluted EPS of between $1.45 and $1.85 per diluted share, which implies an operating income margin range of between 3.5% and 4.25%.

While our sequential backlog growth and other indicators of recovery give us tangible support for optimism, it is still too early to begin to refine our full-year estimates. Look for us to return to the market with new carefully considered estimates whenever and as soon as circumstances permit.

Thank you for your interest and your support of EMCOR. And thanks to our thousands of talented and dedicated employees who have now produced 59 consecutive profitable quarters with more to come.

Now it's time for your questions or comments, and Sarah is here to tell you how to queue. Thank you.

(Operator instructions.) Your first question comes from the line of Alex Rygiel with FBR Capital Markets.

Frank, thank you for taking my questions.

Hello, Alex Rygiel.

Good morning. Very good quarter. Nice work.

Thank you very much. We're proud of it.

Your balance sheet's still carrying a lot of cash. I suspect since you're increasingly more confident with regards to your end markets, you're probably increasingly more confident about putting some of that cash to work. Could you comment on your comfort level at this point in the cycle to not only use a large portion of your cash but possibly even lever up your balance sheet with the assumption that we could be going into an extended kind of up cycle here, slow and steady for the next three to five years?

My confidence level is quite high, Alex, that the -- a combination of what we conclude to be available balance sheet cash together with an acceptable amount of leverage can be usefully put to use to create long-term shareholder value for EMCOR stockholders.

We've done the math on this repeatedly over time. I mentioned that our cash flows in the first quarter were depressed for what I believe to be a good reason, that is to say the end of the de-capitalization process that is characteristic of declining revenues in the Service business. So, I think that -- and that, by the way, was one of the factors that we talked about previously in at least mentally reserving from our cash hoard on our balance sheet an amount that we would hold back in order to recapitalize as both backlog and revenues inevitably improve.

Even having said that, however, there is a cash surplus on our balance sheet together with an appropriate amount of leverage that we can use from our new revolving credit agreement without offending either our internal ratios, our comfort ratios or thresholds, if you will, with respect to leverage on the EMCOR balance sheet, and also the interests of our lenders, of course, and our sureties with respect to the maintenance of EMCOR's normal conservative financial stance.

That number is in our minds all the time. We have specific names and areas that we're thinking in detail about developing. There are some clues to the areas that we might be looking in the slide that's only presented today. I certainly don't want to go into more detail than that. But, I think that the scope and the thrust of Tony's comments with respect to the areas that we'd like to be stronger in, we'd like to be broader in terms of our participation in the entire width of the engineering and construction curve rather than a predominantly late phase player. And those changes and growth areas that Tony mentioned would be instrumental in helping us to do that.

Great. And as we look at EBIT margins, in the last cycle off kind of on a normalized basis excluding one-time items associated with maybe a cost overrun here or there or acquisition costs, your operating margins bottomed at around 1%. How confident are you that the 3.5% posted this most recent quarter could possibly be the bottom of operating margins this cycle?

I'm going to let Tony comment in a second. My gut tells me that we're right around there now. And I find it quite remarkable -- you and EMCOR go back a long way, Alex. And I know that you remember when we used to talk about the potential margin creation at EMCOR, and we considered 3.5% to be a distant and vaguely possible goal. Today, we're treating -- we're talking about it as a possible trough earnings percentage. I think that's remarkable progress, and a strong indication of the way that EMCOR has changed dramatically in many respects since the last recession. Tony?

Yes, Alex. I mean, clearly we're at a much better level than where we are. What I try to do is look at what the underlying drivers are. We know what our guidance is out there this year, at 3.5% to 4.25%. We sense that things are getting better, but I don't think any of us want to give the all clear and blue skies ahead call yet, because we don't know that. I think we all want to. I don't think we all can yet.

And I think -- the way I think about it is what's different? And what's different will tell you whether you think that the margins can be that much better. So, what's different? Well, we have two international operations that are contributing and actually approaching at or above -- Canada was above the 3.5% last year.

And the UK, with a little more restructuring and some things we need to do with some items that are really not operational, can get to 3%. That's a far cry from where we were. And they had habitually given us $1 billion worth of revenue with nothing but sorrow and pain previously, and now we look at them as contributors. And that's quite a transformation and one of the building blocks for what we believe are higher sustained margins.

The second one is what are you doing cost wise to be better than you were before? Well, there's some fundamental shifts that are different today, right? We're doing more and more -- catching the mistakes early through BIM. Some of the toughest jobs we've ever done were hospitals or process plants or white wastewater treatment plants. Now we can find a lot of the mistakes before they happen, because the engineers -- we don't have to build something where our systems were going through a concrete wall. We can now catch that before, and then we can prefabricate it and that'll be good.

I think the other thing that helps things better is we leverage the heck out of SG&A. We not only shed direct labor quickly, we shed indirect labor very quickly. And none of us find that pleasant, because ultimately we're a people business. And so, what we did, though, is got very good at really multitasking. We got very good at not adding a ton of people on the upswing, and we were able to unfortunately shed quickly on the downswing.

And you see the SG&A traction in our numbers. We expect to really get even better SG&A traction as we get through the year, as some of the one-time costs from last year, you don't see them in the run rate. I do think we're starting to head towards the bottom of what we can support on SG&A to maintain the proper going forward.

The other thing we've paid attention a lot to is business mix, right? And so, we've spent a lot work in fixing businesses or restructuring businesses or exiting markets that weren't productive for us while times were good and we had the headroom to do that.

So, you add all that up, I don't know what the exact number is. We know what our guidance is this year, because I don't know the extension of this recovery. Clearly, we need to see a lot -- for ours just to grow again, we need to see more mix come back to private sector and in our services space and we need the refining sector to come back.

And the other thing that's good for us is there's more and more system rich projects out there for us to take advantage of where large mechanical and electrical contractors that have broad based not only geographic but engineering design assist capability really can add value. You're seeing that in healthcare. Data centers has been something that's been buoyant and something we've been able to move across the country with different clients. And they've been a good source of not only margin, but a good source of operating leverage for us because we don't have to repeat the same things over and over again.

So, it's a longwinded answer. But, again, I got to go back to what are the building blocks of margin, not just what the margins are.

That's very helpful.

And Alex, one thing that Tony mentioned that I'd like to expand on very briefly with respect to our Canadian operations is the extremely important credentials that we are building in the nuclear construction and maintenance business in Canada right now. I think it's very timely and apropos with respect to the development of credentials and a credible position that will enable us to participate in new American nuclear projects as they come to fruition, which I strongly believe they will.

We are very successful in our relationships and in our performance in the Canadian nuclear industry already. But, I think the border will not matter when it comes to selection of seasoned, experienced contractors and maintenance personnel for the purpose of assisting in the American nuclear renaissance.

That's great. Good luck. Thank you, gentlemen.

Thank you, Alex.

Your next question comes from the line of Rich Wesolowski with Sidoti & Company.

Hey, Rich.

Good morning. How are you?

Good, thanks.

Frank, could you still say there is an absence of bandits in your organization at this point in the recession, or have you discovered any subsidiaries with backlogs that require extra attention?

No, I think that we continue to operate at levels of problematic projects and certainly levels of claims and disputes that are dramatically below our historical norm. I have never seen anything like it, frankly, in 35 years in the business. We are remarkably clean and straightforward as far as looming issues or major problems. It's quite -- and I must say that, having lived through this movie a few times now, this is extraordinarily unusual in recessionary times.

Customarily, the customers in recessionary times are having their own problems, their own challenges, and they are close to the vest as far as cash is concerned, in terms of adherence to contractual conditions, and sometimes arbitrary decisions to hold back payments just because they can or because they have to. And we're not seeing that. It's quite amazing and speaks to the extremely high quality of both our customer relationships and our subsidiary administrative strength that enables them to stay in touch with their customers and to forge and maintain the kind of strong relationships that keep us liquid and positive despite recessionary impacts.

Yes. I mean, Rich, I'd echo what Frank said. I think one of the things we've worked real hard to do is really have a very rigid view on what's bad is bad. We don't try to kid ourselves that we can take a job to build backlog and hope that it gets better. We've actually been very disciplined, walking from bad contractual terms even though the margins would maybe be okay. We've been very disciplined on even owner customers that we just don't think meet the payment requirements or the contractual requirements or even the margin requirements we have.

And we're been very, very disciplined when it -- but, things happen, yes. They always can, because we have 3,000 projects going on at any given time. But, I would say our work in progress right now is probably in better shape today than it was two years ago as far as -- I'm not saying absolutely margin levels, or we wouldn't have gave the guidance we did. But, as far as reflective, always reflective of the really good execution on labor management and materials management.

Okay. Thanks for the detail on that. Separately, your facilities profit is down sharply during the trailing 12 months. Can you review the different pieces of the facilities service business, because there's a lot that goes into it, perhaps qualitatively how they performed during the past year versus what you had expected in a deep recession?

Certainly. Our Government Services business has performed above expectations on many fronts, from new awards through margin expectations through contract executions, extensions, all of the above.

Our Site-Based Commercial business has performed basically as expected. We had a difficult customer last year that ran into payment problems. We dealt with them in last year's P&L where we took a bad debt charge that was sizeable for our site-based business. That's behind us. We have a good portfolio of work there, and so we see that pretty good. And we have a nice, stable platform of customers that really value good operations and maintenance capability, and we have a good dispatch technician base.

Our Mechanical Service business really -- I've used this line, I think, with you a couple of times, Rich, and others, is having been around that business longer than any other business at EMCOR, because I also did it in my past life, there was a certain expectation of what mandatory was. And so, at a certain level, that's small project work that should happen because of replacements. Now, one, we had a cooler summer than normal last year coupled with owners basically quit spending money coupled with a little more competition.

All that being said, we were able to grow our -- what we call our fixed maintenance base, our service agreement base, to its highest level ever, and we did that at pretty good margins. So, that sets up well for the future, because you typically generate $1.00 to $2.00 of repair service for every $1.00 of service agreement base. And of course, that then feeds your project business for the long-term.

You go to the industrial part of our facility service business, that's been the part that's been hit the hardest, as refinery utilization hasn't been what we thought. Now, the power plant part of that business and the process plant part of our industrial businesses in the facility services has done better than expected. I think it's because of the labor mix we have and as aggressive as we were helping with some outage work.

But, the refinery part's clearly more difficult. We have taken share. We have more customers today than we did. And we have not lost any customers through this downturn that are the kind of customers we want. We lost a few that maybe were starting to run into some difficulties. So, that's been completely a secular downturn. It mirrors with everybody else.

So, you say what's really hitting the profitability? I would say the profitability is really being hit first because of the industrial business, refinery specific, because that's where the larger margins are. And so, when it goes down -- it's still operated well into the black. But, when it goes down, it goes down and brings everything down more proportionately with it. Likewise, when it come back up, we'll see that, too.

Second would be the mechanical service business, not to the same extent as the industrial business. And in the other businesses, really government helped a little bit and site-based really didn't matter either way.

But, if you look -- go to the future, for the first time in the last two months, we've seen our service backlog grow. And we've seen it grow in the small projects business, which bodes well. If we can get another three or four month trend with that with a decent summer, we could see the mechanical service business come back strong.

And so, that's, again, a long answer, but you wanted the detail. So, there it is.

Oh, very, very helpful. Thank you. And then lastly, would you expect the Company to report cash flow at least as high as your net income this year?

That's certainly our goal. I mean, we obviously have way over performed that the last two or three years. The goal is always cash flow at net income. And I'll let Frank or Mark kick into that comment.

Yes, I'm reasonably confident about that. There are moving parts associated, as I mentioned earlier, with the recapitalization process. You don't know how working capital is going to move, that is, how cash is going to move into working capital if growth ensues fairly dramatically. It could be significant, but I'll leave it. Mark wants me to stop saying anything more about it. So --.

Rich, I concur with what Frank has said. I mean, obviously the one variable that's hard to get your hands around is when we do start to see revenues begin to climb, depending on how steep that trajectory is certainly is going to impact the operating cash flow.

I think that's a problem we'd like to maybe --.

But, once again, that's a good problem to have.

And we'd like to manage that problem. If we got a couple large jobs that were fast track or had a plethora of energy efficient upgrades that took us through the third and fourth quarter and we had to invest in the third and fourth quarter to capture the earnings in the first and second quarter, I think we would be more than happy to explain that to you.

Excellent. Thank again.

Thanks a lot, Rich.

(Operator instructions.) Your next question comes from the line of Richard Paget with Morgan Joseph.

Morning, Richard.

Morning, guys. Just to piggyback off of Alex's question earlier, when you talked about how coming out of this recession, EMCOR is a bit different on a bunch of different levels. But, wondered if you could talk about, more in a macro sense, how you guys are viewing this recovery relative to prior recoveries.

In the macro sense, it's really quite interesting. I'm seeing -- I look for broad trends, and, for example, the announcements the last few days about hauled freight volumes, about advertising revenue, about airline utilization, about hotel, business hotel space, who would have thought? I'm quite positive about the general impact of news that we get from the operations of companies like FedEx, that's, I think, a quite reliable bellwether of things to come. And I'm -- this will not shock anybody when I say that I think Warren Buffett was pretty smart in buying a railroad, and timely as well.

I'm always positive, let's be clear. I think I'm realistically positive when I say that the fundamentals that I see both within our business and outside our business tell me that we are seeing a change, a positive change. EMCOR, as we've said many times, is what we call a late cycle business. We're less so than we were in the past, especially with the development of our services business. And we think and we hope that major presence in services will enable us to participate in the early cautious resumption by our customers of expenditures on their facilities.

This is very important to our recovery. The double-digit increase in services' backlog that we saw sequentially in our first quarter compared to the last quarter of '09 tells me that the segment of our business that we always have thought would lead us out of recession is showing signs of doing that.

So, I take both macro and micro, if you will, lessons from what I read about, what I hear about, and what I know about within EMCOR to say that we can draw cautiously positive conclusions from all these things. There is no question that there is a very serious weight, a burden on the economy, not just for EMCOR but for everybody with respect to the unemployment figures.

And I think that perhaps the last segment to come around for EMCOR and a lot of other people will be greenfield CapEx spending on leveraged office buildings. But, I hasten to add that we do not depend upon those kinds of projects for our growth and development. I've been working as hard as I can to persuade the market that we are not a commercial construction company, that we are much broader than that.

Our largest sector in backlog terms is healthcare, and we're heavily involved in other very reliable long-term demographically driven sectors -- transportation, institutional, water and wastewater. They all contribute to EMCOR's results. I would love for commercial to come back and in a hurry. But, if it doesn't, we'll be fine.

Okay. And I know you talked about your facilities' margins in the quarter, but with US electrical, it was down a bit more than I thought. And I know in the Q you talked about some lower gross margins and I'm assuming that is some mix, some competition, and then you had some selective bidding, so maybe utilization might be down a bit. But, what -- was there anything else in the quarter that drove them down a bit, and what should we expect going forward?

Yes, a couple of our more successful subsidiaries had a little slow quarter. Part of it is they're just starting up jobs. They are starting to win work in the Mid-Atlantic region. And we did get affected, I wouldn't say to a great deal, but you are seeing it a little bit in the electrical margins, because that's where it rests, by the weather in the Mid-Atlantic. It did affect some pretty significant job sites.

So, those things are going to bounce around a little bit quarter to quarter. But, we've routinely run a very profitable electrical business, and we see no reason why we wouldn't continue to do that.

Okay, thanks. I'll get back in queue.

Thanks a lot.

Your next question comes from the line of Matt Tucker with KeyBanc Capital Markets.

Good morning, Matt.

First question is just could you provide a little color on the kind of key swing factors underlying the low end and the high end of your EPS guidance range?

Yes. The range is formulated in our usual manner, that is to say I have a high degree of confidence in the low end of the range. We think that the midpoint of the range is a realistic target area, assuming that certain events and/or trends such as the continued flow of stimulus funds into areas that EMCOR finds attractive, not pothole filling but projects like the technical project that Tony mentioned in his portion of the call, and a continued gradual release of extension of credit to -- not just to our customers, because we generally work for customers who don't have credit problems. We work primarily for the Fortune 500.

But, I think that -- I look upon the evolution of credit availability and terms as an indication of confidence on the part of customers as a whole, not only our customers but our customers' customers. And so, positive trends in those -- in areas like that, including those two areas, will take us through the midpoint and towards the upper end of our range.

There are certain seasonal factors that could help. Tony mentioned the weather. EMCOR would like very much for New York to be sweltering in 80-degree weather not just this weekend but for a month or so to come. That would be immediately and significantly positive for us in terms of our HVAC installation, service, and repair business. And we'd very much like for the American public to get out and drive like mad this summer so that they use up a lot of gasoline and refinery maintenance -- excuse me, refinery utilization statistics continue to ratchet up as they have for the last three or four weeks.

Those are the kind of factors, specifically the facility maintenance and the refinery utilization factors, that could have a pretty significant effect on the upper end of our guidance range.

Okay, thanks. That was really helpful. I guess just to follow up on the stimulus comment, do you guys have a sense for kind of where we are with -- in terms of stimulus, in terms of how much is left?

I think we can only -- I don't go to the --.

Oh, there's a lot left.

There's a lot left, and I don't go track it. But, when it pertains to us, right, and we do talk to the folks in the buildings that we help run for the GSA, facility manage, and we talk to other different folks. I don't even think, for the kind of things that we'll do, that we're even at the halfway point yet.

I have -- I was one of the delegates to the White House Jobs Summit in December, and we have since followed up with the Energy Secretary on plans for utilization of the funds provided to the Energy Department under the stimulus program. The last time I talked to the Energy Secretary, that department had spent $2 billion of the $39 billion allocated to it under the stimulus program. They're having trouble getting out of their own way, but sooner or later the kind of projects, specifically energy efficient retrofits and other energy related projects that EMCOR excels in, will be coming available to us.

Okay, great. And then, my last question was just on kind of your input costs, I guess in particular labor costs. I guess how do they compare versus last year? What direction do you see them trending, as well as kind of the major costs with the SG&A? I mean, you mentioned that you may not have much further room to cut there, but maybe what levers do you still have, if any?

To break it out, Matt, I mean, if you go to labor mix, we've actually had very productive -- let's break it union/nonunion first. On the union side, we've had some of the more productive negotiations on a number of levels. We don't do that here centrally. We don't manage any monolithic relationships. They're done at the local level.

But, most of the contracts have looked like this -- wage freeze, wage freeze, maybe more contributions to the pensions in lieu of wages. Some of them are only one or two year deals looking at what's going to come out of that and will the recovery happen. We don't hear a lot of talk from the unions anymore, because they realize with 25% to 30% unemployment in the trades, it probably doesn't make sense to talk about how much the stimulus is going to help and why they should be getting more wages.

You're seeing more and more flexibility on crew mix in some of the unions at a local level. And then, the final thing you're starting to see is more project labor agreements and target money out of the unions so that our contractors can be more effective, the union contractor could be more effective going after some of the work. And of course, all the stimulus work is prevailing wage work, so that helps.

Now, you go to the nonunion side, you're definitely seeing a reduction in the premiums we had to pay in the last three or four years, especially in the refinery space and in the power plant maintenance other space. I mean, they're still doing very well, but people are pragmatic. They want to work.

So, we're not getting a lot of wage pressure right now. And I don't anticipate that for a while. I mean, the market's got a long way to go to recover, especially back to 2008, back half of '07 levels, early 2009.

If you go to the SG&A, I mean, we think the level we're at now on a quarterly basis is probably sustainable through the year. Absent some big uptick in profitability that we don't see outside of our guidance range which would affect incentive compensation, we think the rate you saw in the first quarter is pretty sustainable for the year, which would put us down almost 17% from our peak SG&A in 2008.

Thanks, guys. That's all I had right now.

Thank you.

At this time, there are no further questions. Management, do you have any closing remarks?

As usual, we thank you for your interest in and support of EMCOR Group. Thanks to all of our employees who created that profitable quarter number 59. And watch this space for future and positive developments. Thank you all.

This concludes today's conference call. You may now disconnect.