EMCOR Group Inc (EME) 2010 Q3 法說會逐字稿

Good morning. My name is Sara and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Third Quarter 2010 Earnings Conference Call. Operator Instructions Mr. Eric Boyriven of FD, you may begin your conference.

Thank you, and good morning everyone and welcome to the EMCOR Group Conference Call. We are here to discuss the Company's 2010 Third Quarter results as we reported this morning. I would now like to turn the call over to Kevin Matz, Executive Vice President of Shared Services who will introduce management. Kevin, please go ahead.

Thank you, Eric and good morning, everyone. Welcome to EMCOR Group's Earnings Conference Call for the Third Quarter of 2010. For those of you who are accessing the call via the internet and our web site, welcome and we hope you have arrived at the beginning of the slide presentation that will accompany our remarks today. Currently, we are on the title slide. So please advance to slide two. Slide two depicts the executives who are with me to discuss the quarter and nine months' results.

They are Frank MacInnis, Chairman and Chief Executive Officer; Tony Guzzi, our President and Chief Operating Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; Mava Heffler Vice President Marketing and Communications; and our Executive Vice President and General Counsel, Sheldon Cammaker. For call participants who are not accessing the conference call via the internet, this presentation including the slides will be archived in the Investor Relations section of our web site under Presentations. You can find this at www.emcorgroup.com. Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR 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, which we all know may happen today, changes in the specific market for EMCOR services, adverse business conditions, increased competition, mix of business, availability of adequate surety bonding and risks associated with foreign operations.

Certain other risks and factors associated with EMCOR's business are also discussed in the Company's 2009 form 10-K. 10-Q for the third quarter ended September 30, 2010, and in other reports filed from time to time with the Securities & Exchange Commission. Now, before I turn the call over to Frank, most of you know this is Frank's last Earnings Conference Call here with us. And it has gotten me to thinking about how many times I have let off the calls with Frank sitting ever so quietly at my side. If you only knew what really happens here during these interludes. So, quarter after quarter, year after year, I would introduce Frank and he would, in his thoughtful and eloquent way, thank me back so warmly. I could not get enough of those attaboys. So, today, do I finally get him back with zinger after zinger making up for lost time or do I tread a bit carefully, for as you all know, he is not just riding into the sunset, Frank will remain non-executive chairman but then again, how could that ever hurt me? So, instead, no zingers, although I have a truck load of them and some might say I am wussing out here. However, retreat to fight another day is probably wise. And, I will instead present to Frank, in front of you our long tenured call and internet audience, a gold colored --pretty nice spray paint job, isn't it-- gold painted trophy in the shape of a microphone with the following inscription.

Frank T. MacInnis, that is you, the Voice of EMCOR For 63 Consecutive Quarters. Frank has been sort of like Cal Ripken. He did not miss a game and Lord knows in the last few years, he was not always playing at full physical strength. So, Frank, here you go. And make us proud. We expect this to get a prominent position in your office right next to your ancient Greek and Roman glass collection.

To paraphrase Sally field, "You like me, you really like me." Kevin, may I say that the quality of your introductions over the years has been a significant factor in my decision to retire. So, Tony should be thanking you. Thank you all very much and good morning. Welcome to our 63rd 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 web cast. And we will be referring from time to time to a slide number to identify the relevant slide for web cast participants. Right now, we are on slide two. The focus of today's call will be on the 2010 third quarter and year-to-date earnings press release and form 10-Q that we issued and filed earlier this morning.

Continuing a change that we inaugurated two quarters ago, in conjunction with my retirement announcement, I will make some brief opening remarks, identifying the salient features of this quarterly report including the market trends and EMCOR characteristics that have shaped our performance since we last talked. Then I will hand off to Mark Pompa, our CFO for a more detailed review of our financial statements. And Mark in turn will hand the call to Tony Guzzi for an operational overview, a discussion of trends and contract backlogs, new orders and what they tell us about future performance and his thoughts about EMCOR's prospects for 2010 and beyond. Finally, I will wrap up the call with a few words about our increased earnings guidance. At which point, there will be an opportunity for listeners to make comments or to ask us questions and you can see from slide two that a number of our senior officers are here to help with the answers. So, let us begin.

Please go to slide three. I am sure it will not surprise our listeners when I say that the engineering, construction, and facility services sectors continue to be affected by the same recessionary forces that will apparently shape the outcome of today's election. The benefits from the Federal Stimulus Program have been generally disappointing and lack of investor confidence together with continuing credit constraints are depressing demand for private sector development projects. Fortunately for EMCOR and for our stockholders, the market diversity that has been a fundamental part of our operational strategy for many years, enabled EMCOR to show steady overall operational performance in the Third Quarter. Disciplined projectual activity together with strength and growth opportunities in several of our public sector markets, such as healthcare and government services, has resulted in stabilization of both demand for our services and margin opportunities. We recognize the non-cash impairment charge which I will discuss in a moment. But exclusive of that charge, adjusted Third Quarter operating income was 4.05% of revenues, much better than our performance in the last recession. And adjusted third quarter diluted earnings per share was $0.45. All our segments performed well in operating income terms with the exception of our Canadian segment which recognized an $0.08 charge against earnings per share on an industrial project. We regard this as an isolated event and unrelated to Comstock Canada's continued good work especially in the nuclear energy and healthcare sectors. Overall, we are pleased with the operational results in the Third Quarter. And will you see from our revised guidance that we expect this good execution to continue for the remainder of the year.

As I mentioned earlier, we recognized a $226 million non-cash impairment charge against goodwill and certain trade name assets. The recession has significantly reduced demand for refined products and there is continued uncertainty about the pace of the revival of that demand which is key to the revenues and profits of the industrial and refining sector of our US facilities services segment. As Mark will discuss in a moment, those depressed markets for gasoline and pet-chem products resulted in a reduction of our revenues and profits from forecasted levels and led to the non-cash charge which had no effect on EMCOR's compliance with our debt covenance or on our cash flows. Despite this charge, we are confident that these operations will continue to be profitable and that they are well-positioned to participate in the eventual recovery of the refining of petrochemical sectors. Please go to slide four. Due in large part to the strong performance of our government services and healthcare operations, our diverse order book remained at $3.14 billion, level with year-end 2009 and indicative of the stabilization that I discussed a moment ago. About a month ago, we bolstered and diversified our government services group with the acquisition of a Jacksonville-based government contractor that Tony will tell you more about. And we remain in the hunt for more opportunities to expand and diversify our services menu. And we have lots of dry powder.

Our usual strong liquid balance sheet with modest debt and $641 million in cash. Now, here is Mark Pompa to tell you more about our financial results. Mark?

Thank you, Frank. For those of you participating via the webcast, we are now on slide five. I will begin with certain highlights of our Third Quarter results before moving to key financial data derived from our consolidated financial statement included in both our press release and form 10-Q filed with the Securities & Exchange Commission earlier this morning. Revenues were down 6.9% for Quarter Three as we are seeing continued weakness in our US construction business revenues as reflected by our mechanical construction services segment revenues being down 8.7%, our electrical construction services segment revenues down 2.8%, which results in total construction revenues down just over 6% quarter over quarter. EMCOR's revenues continue to contract due to prolonged weakness in the US private sector non-residential construction space. Our United States facilities services segment reported a modest revenue increase which benefited from the impactive growth in our government services revenues as well incremental revenues from our Pittsburgh-based service acquisition closed earlier this year. The growth of facilities revenues was muted by revenue declines within our industrial services business which experienced lower demand for its refinery and petro-chemical services due to temper capital project activity and the continued deferral of maintenance spending. Our international revenues continue to decline with both Canada and the UK both reporting double digit revenue decreases in the quarter due to the continuation of challenging market conditions in both geographies. The Company reported a $226 million pre-tax non-cash impairment charge during the quarter.

The component parts of the charge are $15.6 million pertaining to the dimunition in value of certain trade names, and a $210.6 million reduction in recorded goodwill values based on the results of our step two testing. Both the trade names and goodwill charges are attributable to our facilities services segment and are resulted from prolonged weakness in revenues and margins principally attributable to our industrial business. We reported an income tax benefit for the quarter principally due to the impact of the aforementioned impairment loss. Our expectation is our Quarter Four effective rate will be around 38%. Operating cash flow for the first nine months was a negative $30.6 million which includes the supplemental funding contribution of $25.9 million made to our UK defined-benefit plan disclosed during Quarter Two. On a sequential basis, we generated approximately $50 million of cash flows from operations within the quarter which is reflective of our strongest quarter-to-date for 2010. Please turn to slide six. Quarter Three gross profit of $172.9 million represents 13.5% of revenues, which is down from the comparable 2009 quarter, and is approximately 30 basis points less than our Second Quarter 2010 operating results.

We continue to reduce our selling general administrative expenses with Quarter Three 2010 expenses of $119.5 million representing 9.4 % of revenues and an $18.4 million decrease from 2009's comparable period. As a percentage of revenues, 2009 Quarter Three was 10.1% or 70 basis points higher than the quarter just ended. Restructuring expenses of $1.7 million were recorded in the Third Quarter as a compared to a diminimous amount in 2009's Third Quarter and were primarily isolated to our Canadian operations. And as previously disclosed, we recognized the $226.2 million impairment loss due to the change in fair value of trade names and goodwill associated with certain prior-year acquisitions within our United States facilities services segment. The resulting operating loss for the quarter is $174.4 million as compared to $67.3 million of operating income a year-ago period. Operating income adjusted for the add-back of the impairment loss is $51.8 million or 4.05% of revenues which represents a 23% reduction from the aforementioned $67.3 million reported in Quarter Three 2009. Adjusted operating margin declined 85 basis points from the comparable 2009 quarter, largely driven by the reported loss in Canada and declines in the UK and US facilities services. Our United States operations reported 6% operating margins for the quarter compared to 6.4% in Quarter Three 2009. Diluted loss per common share for the quarter is $2.64 compared to $0.59 per diluted share a year ago.

On an adjusted basis reflecting the add-back of the impairment loss, diluted earnings per share would be $0.45 for the three months ended September 30, 2010. Please turn to slide seven. With respect to our nine month results, revenues of $3.8 billion declined 10.1% from 2009's year-to-date period results of $4.2 billion. Gross profit of $514.4 million, or 13.7% of revenues, decreased 90 basis points, as compared to $613.3 million , or 14.6% of revenues of gross profit in the corresponding year-to-date period. Restructuring activity of $2.5 million is reduced from 2009 year-to-date levels of $4.2 million. For the nine months ended September 30, 2010, we are reporting an operating loss of $97.1 million. Adjusted for the add-back of the impairment losses would result in operating income of $149 million, or 3.96% of revenues which is 97 basis points less than the $206.4 million or 4.93% of revenues reported in the 2009 comparable period. Diluted loss per share for the 2010 year-to-date period is $1.91, as adjusted for both the impairment losses and the elimination of the gain on the sale of the equity investment reported during Quarter Two, adjusted diluted earnings per share is $1.23 as compared to $1.81 for the first nine months of 2010. Please turn to slide eight. EMCOR continues to maintain a liquid balance sheet of cash of approximately $640 million and total debt levels of $150 million.

Working capital levels continue to increase from December 31, 2009, and as you can see on slide eight, the resulted reductions in goodwill and identifiable and tangible assets are due to the charges previously discussed. Leverages represented by our debt-to-capitalization ratio remains modest at 11.85% as of September 30, 2010, which is down from 2009 levels due to the associated debt repayment during Quarter One's refinancing. Our balance sheet remains liquid and moderately leveraged as we continue to evaluate all strategic opportunities. That completes my portion of this presentation and I will turn the presentation over to

Thanks Mark. And we should be on page nine - Operational Overview. For the most part, we had excellent execution in our US electrical and mechanical construction segments. For where we are in the recession, the performance has been terrific to-date, and we like it. Mechanical services segment benefiting in Q3 from really good seasonal weather, and we talked earlier about the $0.05 a share, and in fact we realize that in our repair service business.

However, the balance of the business exhibited recessionary pressure, especially in the small projects business which is a significant part of that business. Canada incurred an operating loss as a result of a write-down on an industrial construction project where, quite frankly, we were not as sophisticated as we usually are. We had an owner lull us to sleep and say that we would help with the change-orders and everything would work out fine. We are now off the job and we have taken the appropriate position. The refinery market remains challenged, as Frank talked about, because of the lack of demand for refined products, especially gasoline, which is directly tied with what is going on in the unemployment markets. A significant portion where the most of the downfall in the facilities performance is directly related to our performance in the refinery market. Our focus remains on the things we can control. And those the things we can control is the amount of risk we take in our project execution and our cost management. And our performance to-date, not only on cost management of SGNA but on labor and labor productivity, has been terrific throughout this recession.

Our back-log is stable, but it does reflect the uncertain economic environment with its lack of private work. I will now switch to the back-log side and you will be on page ten. Our Third Quarter contract back-log stands at $3.14 billion. It is level with Quarter Two and year-end levels of 2009. In summary, and as expected thus far this year, back-log is down in domestic construction, and partly offset by increases in our facilities services segment, and international. If pacic decline continues to lessen on a year-over-year comparison basis, as we continue to believe we are moving along the bottom of the cycle. In looking at the bar charts on page ten, you can see we continue to work down back-log in the hospitality sector, which is the last phases of our work in Las Vegas. And while the commercial back-log is represented by the golden section is down about 9% from year-end, we did improve slightly from Quarter Two mainly due to small projects in our facilities services businesses. We continue to see demand for healthcare projects, and in fact healthcare back-log is represented by the light green block represents approximately 24% of our total back-log. Institutional industrial work continue to perform better and are offsetting the more lumply transportation, water, waste water sectors. All in all, back-log has stabilized with a book-to-bill ratio of 1.0 through the first months of 2010, which shows balance, diversity, and stability.

As I stated on last quarter's call, we continue to be selective and disciplined in the work we bid and undertake as our markets remain challenged. The majority of our work remains in the public and quasi-public sector and will remain there until the private sector begins to benefit from more positive macroeconomic factors. This one of the benefits of our diverse business mix and our flexibility. And it is our ability to move among markets which means our ability to move into private markets when they are there, and public markets when they are there and to be able to execute well in both markets unencumbered. Our recent award this quarter showcases some household names across the country and I will ask you to turn page 11 now. So we will start healthcare which has been a good story for us during this downturn, and we have talked about that earlier. We are benefiting from some macro trends there, we are also benefiting from some great execution trends for our part with respect to BIM--Building, Information, Modeling, prefab, and some great project planning.

So, let us talk about healthcare. Our first project is in Wheeling, West Virginia, at the Wheeling Hospital. Our EMCOR services Scalise industry subsidiary, which we acquired in January of this year, will be installing the HVAC, plumbing, and electrical systems for the new seven-story, 144,000 square foot addition that will house a new state-of-the-art emergency department intensive care and cardiovascular intensive care units along with the new pediatric wing. We knew Scalise had great healthcare expertise both on the installation and the service end, and it is coming to bear here, in Wheeling, West Virginia.

They also have big relationships throughout the western-Pennsylvania market with UPMC and other owners. As we stay in healthcare, our Merrill-Lynch mechanical subsidiary will be installing the mechanical steam, domestic water, and medical gas systems including the boilers and chillers for Kaiser's new 6-story 434,00 square foot hospital power in San Leandro, California. This large project also includes fitting out the mechanical systems for 12 operating rooms and installing the underground utilities feeding the hospital power from the central utility plant. Look, when we were young, I am sure everyone remembers the Good-Humor ice-cream truck coming down your street on those hot, summer days. And just remember Shamble and Son when you see them today because Shamble and Son will be constructing a 6500 square foot, two-stage refrigeration system for Good-Humor/Breyer's ice-cream plant in Covington, Kentucky. This mammoth system, consisting of 17 high-capacity ammonia compressors, were three-D modeled--it was BIM modeled, to adhere to a very timely schedule. By the way, this project currently is the largest refrigeration installation in the US. In Chicago, Illinois, our Gibson subsidiary will be installing the electrical systems for Astellas Pharmaceutical's new corporate headquarters.

Gibson will be working on the two six-story office buildings and our scope of work includes the build-out of high-voltage power, lighting, and fire alarm systems, UPS and associated back-up generators. And in Los Angeles, at the airport, our Dynalectric LA operation will be the electrical contractor for the Bradley West Core new terminal. Dyn's scope includes the structure cabling, data, wifi, paging, access-control, video-surveillance, fire alarm, and life safety systems. That gives you a pretty good idea what a good electrical contractor does for EMCOR on that job. Additionally, Dyn will install the entire lighting package and emergency power systems for this new facility. And in Houston, Texas, our Gowan mechanical operation will be the mechanical contractor for Halliburton's new North Campus technology building which is 214,000 square foot, two-story, state of the art, industrial laboratory. Gowan will be installing the HVAC system, ductwork, lab control equipment, process and plumbing piping systems and all testing gas systems. This fast-paced project targets completion during the first quarter of 2011. In California, Mesa Services will be performing an energy efficiency upgrade for AT&T Internet Data Center in Irvine, California. This project entails eight 300 ton chillers, high efficiency chillers, installing variable frequency drives on the pumps, as well as installing a new control system. This will provide AT&T with a more reliable system.

It will be cheaper for them to use and it will minimize energy usage but it will increase system response capability and improve the redundancy that AT&T needs. And finally, here in Connecticut, our Tucker Mechanicals operation is performing a number of HVAC and plumbing infrastructure upgrades at Yale University's Medical Laboratories here in New Haven. Similar with what Mesa is doing for AT&T, it is taking old equipment out, doing the engineering that needs to be done to bring this equipment up to date, and the system more efficient. We have talked about energy efficiency many times, it is a good long-term macro trend, it is something we are benefiting from, it is something that will grow as time goes on. It has good long-term fundamentals, terrific paybacks for the owners and reduces everyone's carbon and energy footprint. And look, at Yale, about three weeks ago, I had the opportunity to be involved in a pretty neat event. At EMCOR a year ago, we had a couple of our folks come to us and say we want to find a different way on some of the jobs, especially as we do the healthcare work, helping support breast cancer, breast cancer research. We have always been big supporters around the country of the Walk for the Cure and the Race for the Cure depending on where you are at. But we have done something different.

If you look around the country, and you go to Johns Hopkins where we just about completing a major job now, you go to the Phoenix Children's Hospital, you go over to the UK at British Airways and you go here to the Yale Cancer Center, you would have saw really great looking pipe fitters and electricians wearing pink hard hats in the shape of a ribbon. And that was our folks' way of showing their support for breast cancer research. We have actually sold these helmets. We raised money and it has really been a great way to bring our company together and support a great cause and I thank our folks for supporting it. 4,000 pipe fitters in pink helmets is quite a sight to see. I would ask you now you to turn to page 12 where I will talk a little bit about Harry Pepper and Associates. We have talked a lot about our success in the government sector. We have been big brack contractors. We have a great government services business that does base-operating work and GSA maintenance work and we do everything from maintaining steam tunnels and also maintaining classified buildings around the country. Our customers quite frankly, were asking us to do more because we are a contractor that they trust. And we bought another contractor that they trusted, Harry Pepper and Associates. Harry Pepper and Associates is Jacksonville, Florida, prime infrastructure contract that really self-performs mechanical work. Pepper's work is 100% focused on state municipality and federal government work.

What markets do they serve? They do government facilities and infrastructure, water and waste water, storm water treatment, flood control. They do civil, excavating and land clearing. Who do they work for? They work for our customers who we have today. The US Department of Navy, the Army Corps of Engineers and other municipalities throughout the southeast. Pepper does about $100 million in revenue and brings with it a back-log of about $150 million which is not in our current back-log numbers because we close this post-Third Quarter close. What it does for us is strengthens the reach, scope, and services we can bring to our government clients. I will ask you to turn the page to 13 while I talk a little bit about a balance of the year outlook. Look, I do not think it is a secret to anybody on the call that commercial and hospitality markets remain under pressure, in fact, that may be the understatement of the day. And that private sector confidence needs to return and more normal credit relationships return. Frank talked a little bit about the pace of recovery and that really is what EMCOR is depending on now is the pace of the recovery to quicken a little bit as we move into 2011. We are operating steady, we are operating in a diversified manner, and we are controlling the things that we control.

We are having great execution. You saw the results in our EMCOR construction services business and absent the headwind we face in the refinery sector, we are performing well in our services segment, especially the government and repair services portions of our business. We are leveraging resources across EMCOR. We are taking customers across EMCOR, especially with respect to infrastructure clients and data center clients. And we are getting terrific labor productivity right now through crew mix and quite frankly, we are down to our best people, and therefore, they know how to work for us and we know how to work with them.

We are consistently beating our labor productivity on jobs. We have a great balance sheet, it is liquid and strong. And we are always looking for the right investment acquisition opportunities although we run into some headwind as private equity has shown a propensity to pay way beyond what EMCOR will do. Although, with deals like Pepper, where EMCOR has the advantage to buy, continue to be available. And with that, I will turn it over to Frank for the wrap-up.

Thanks, Tony. While you were talking, I have been holding the golden microphone that Kevin presented to me and it seems to be turning my fingers green. Oh, well. I think that the main message from our Third Quarter Report is one of stability, and of continued excellent execution, with the single exception of the Canadian project loss. Likewise, the non-cash impairment charge was the unfortunate consequence of prolonged weakness and demand for refined products and uncertainty about the pace of recovery, not a sudden or unexpected decline in the quality or the positioning of our assets to continue to be very profitable and to make increased profits in the future. In our last quarterly earnings call, I reiterated our previous revenue guidance for full year 2010 and increased and refined the expected range of our adjusted diluted earnings per share to a range of $1.60 to $1.85. At that time, I cited the recessionary effects discussed earlier, especially lack of private sector customer confidence but said that our emphasis on efficiency and productivity gains and cost reductions should enable us to show good performance despite weak private sector demand.

Today, our view for the remainder of 2010 remains positive. We reiterate our previous revenue guidance for full year 2010 at a level of approximately $5 billion. And we narrow and revise upward our estimated range of diluted earnings per share, excluding impairment charges and a gain on sale of an equity investment, to a range of $1.78 to $1.90, implying Fourth Quarter EPS in a range of $0.55 to $0.67. Including those previously-excluded items, diluted earnings per share would be in the range of negative $1.36 to negative $1.24. We continue to await clear indications of the pace of economic recovery during 2011 before providing comments on estimated EMCOR performance during that period. But we are very confident that our company is well-positioned to participate fully in growth opportunities in a multitude of markets as they occur. That is it for now.

Before I hand the call back to the Operator and you queue for questions and comments, I want to thank you, our listeners, for your interest, your support, and informed participation in these 63 earnings calls over the last 16 years. The format and the content of these calls were meant to reflect EMCOR's traditions of frankness and openness with the respect to the opportunities and the risks in what we do. They also reflect the respect and appreciation that we hold for the intelligence and the opinions of our listeners. That is why I have led every one of these 63 calls. And it is why I wrote every word that I have spoken in each and every Earnings Report. Finally, our tone occasionally reflects my personal views that life is much too short and that we should strive to find enjoyment in whatever we do, including earnings calls. It has been a privilege and a pleasure to represent EMCOR and it is with great confidence that I hand over our future calls to Tony and the team. Now, it is time for your questions and comments and Sara is here to tell you how to queue.

Operator Instructions Your first question comes from the line of Rich Wesolowski with Sidoti & Co.

Hi, Rich.

Good morning, Frank, everyone else, thanks for the laughs.

[ Laughter ] You are welcome.

We have recently heard of another contractor of a meaningful size entering the gulf coast market for heat exchanger services, setting aside the downturn in maintenance spending in that market since '07. Would you comment on Olmstead's market position today versus when you bought them? From what we have seen, and we track our customers pretty closely, Rich, is we have kept all of our customers. We have kept our share of our customers and with Olmstead's five strategically located plants along the gulf coast, and the majority of the industry not having the engineering capability that Olmstead may have, I think it would be very difficult for someone to meaningfully attack Olmstead's position with its most significant customers.

Because we combine not only the field services, the implant services, which I think that competitor may be talking about, but also with the ability to have quick turn in our shops to get the heat exchanger fixed, repaired, and back in service as soon as possible.

Okay. Simply, how confident are you, if at all, that facility investment in general, not just in the refinery space, but across your markets, will be higher in 2011 than it has been in 2010?

Rich, it is Frank. That is the real question, is it not? It is a matter of investor confidence. I think that it is tied in part to the rate of change in employment. That, in turn, is all about confidence on the part of investors, property developers, commercial building owners in terms of retrofits. It depends in some respects on government policies as far as the stimulation of energy efficient retrofits and the like. But I think the fundamental issue is when the current de facto lending constraints together with investor confidence begin to turn and support a macro growth pattern that is inevitable but still hard to see.

Okay. And then finally, Mark, if I wanted to assume that your back-log does not fall much more this cycle, would you expect your net over billings position to continue to fall?

Yes, we are anticipating once again if we are going to burn what is in our back-log, without any new sizeable project awards in the short term, you are going to see the net over bill position continue to move down. But as you can see, it is moving moderately down at this point. The only differential you see in the September balance sheet is that the asset side of that equation is up slightly from where it was in June but the liability side is just relatively flat.

Great, thank you.

You are welcome.

Thanks, Rich.

Your next question comes from the line of Alex Rygiel with FBR Capital Markets.

Alex Rygiel.

Good morning, Frank, and 63 times they have got it wrong but that is ok. [Laughter] I do want to say that I am going to miss your comments about Kevin's shoe size, the color of his shirts, the quality of his seeing, the Dale Carnegie training and all of the other things, so, it will be missed.

For a guy whose third language is English, though, he does well.

So true. And Kevin, I am a little disappointed you did not zing Frank back. But we will look for it on the next 63 calls.

There you go.

Two questions. First, Canada. Was this truly a one-off or is it a developing problem because Canada has been tricky through past cycles, so a little bit more color on that.

You are certainly right that Canada has been tricky in past cycles but we have spoken on past calls about the really remarkable transformation that has taken place in Canada since we replaced prior management about four years ago and changed completely the focus of the company withdrawing from the energy-related west, for the most part, except for major public sector projects and concentrating on the commercial and industrial east where we have established major positions both in the nuclear power business and in healthcare and in industrial contracting. We are very pleased with the job that Jeff Burkbeck and his management team have accomplished. This project is a real throw-back and a very isolated event. The individuals involved were taken for a ride by an unprincipled owner, it is unfortunate, but occasionally it happens, but my very long experience enables me to say that this is a good company that made one mistake.

And secondly, cash balance. We are going to continue to ask Tony this going forward, so figured we would get your last comments since you will still be involved in the Board. But you have a lot of cash, you used a little bit for the most recent acquisition. When do you anticipate, or would you expect to accelerate your use of cash for either acquisitions or enhancing shareholder value in other ways?

We talk about this at every board meeting. The board is aware that I think we have an underperforming balance sheet in terms of gaining advantage from the remarkable amount of cash that we have been able to accumulate. On the other side, you know EMCOR's management for our conservatism and care with respect to overspending. You know that the market is overheated for M&A activity when Blackstone is complaining about the prices being so high so that they can not get in. Well, EMCOR is a lot more conservative than Blackstone, not withstanding that, I think that there are tax-related, and perhaps some set provisional-related aspects to the overheated M&A market just now that may go away at the end of the year and I am hopeful that the first part of 2011 will show some relaxation in M&A demand and M&A pressure to get things closed before tax rates change.

So, I hold out some hope that we can find, as we are actively looking for new investments that will continue to expand the scope and size of our services. And that will be our first choice. Failing that, if we literally run out of ideas then of course, we can contemplate the development of a dividend, either special or recurring and even my announcement of the possibility of a stock buy-back. We are an operating company and we are looking for ways of enhancing EMCOR's performance for the very long-term, not for the short-term.

That is great, Frank, best wishes in retirement and lots of respect.

Thanks very much, Alex, I appreciate it.

You are welcome.

Your next question comes from the line of John Rogers of D.A. Davidson.

Good morning.

Hi John.

And thank you, as well, Frank, we really appreciate your efforts.

It is a pleasure.

One thing I wanted to ask, if I look at your business in the guidance for the Fourth Quarter, we are not seeing the normal seasonality that you would expect in this business. Is that just where we are in the cycle, or is it, because I am assuming Harry Pepper will not have a meaningful impact on gap earnings?

No, it will not have a meaningful impact on gap earnings for a while as it goes through its back-log.

Right.

What you are seeing, John, is a couple things. The first one is, if you look at our mix and our back-log right now, a lot of public sector work, the scheduling is a little different. I think you are also seeing the full effect of really having a diverse company, geographically. When EMCOR used to really show the more-strong Fourth Quarters, if you look at the last couple years we have much more balanced in our earnings. You are seeing the effect of really not only our end-market diversity but our geographic diversity that has been accomplished over a long period of time, mainly here in the US. I think the other thing you are seeing is partly the impact of the facilities business. When Olmstead was really going you really did not see the same kind of First Quarter, Fourth Quarter diversity that you had seen in the past. So I think you put all those together, we are a much more balanced earning company than we had been historically. Again, it is a number of factors and it is something we have been working towards.

Okay. And so going forward, I assume when the construction business starts to come back, assuming it does, do you think we will ever see that seasonality again? From a management and operating point of view, I would assume it is easier to run the business without that seasonality.

Well, I think you will see pieces of it. If the private sector part of the business comes back, and it grows, it is much quicker, the projects are of more moderate size. And as you start to get into things like tenant fit-out and other things you will see at times, more lumpy earnings. I think the other thing as we grow, and it is something we have talked about in the past is something everyone should keep in front of them--when the market recovers, we have something here at EMCOR called the 20% Rule. So as the market recovers, we will not be recognized in profit like we --

Right.

--ever do on the first 20% of our project, and so we will go through that period too, and so that may lead to a little dispersion of the profits that will be different than they are today. Okay, great, thank you.

Your next question comes from the line of Avi Fisher with BMO Capital Markets.

Good morning Avi.

Hello, good morning, thanks for taking my questions.

Pleasure.

I just had a quick question about the four key strength implied by guidance. What is driving that? You usually have typical year-end true-ups on construction projects, is that what is driving it?

We do not typically have that, right? We have had a couple quarter, way long time ago in the international business where we had some year-end screw-ups on construction projects--

I said true-ups. True-ups, oh, I thought you said screw-ups.

[Laughter] Avi, we have a number of factors coming to bear here. First of all, as I mentioned during the presentation, our OI performance during this recession has been remarkably good in my opinion. The old-timers on the call will remember when we became a 1% company for a while in the 2002 through 2004 recession. And we are much stronger, much better organized, much richer and much better managed this time around.

So, when we report an OI percentage over four, and if you wanted to add back the Canadian charge, it is actually more than four and a half, that is really good performance. And stable operations in terms of general absence of badness, significant reductions in SGNA which we anticipate will prove quite sticky even when the market does turn around, good cash flow performance and the rest suggests to me that you are just looking at a really good execution quarter supplemented modestly by the reversal of accruals that we have taken in certain sectors of our operations where customers were under pressure and we knew that and we decided to be prudent about the extent and pace at which we recognize revenue and profit. So when we can finally see the successful end of projects that we have been worried about, we are in a position to recognize some earnings that were in doubt for a while. I think it is a combination of all those things but I think the fundamental message here is that EMCOR is a stable, well-executing company and we are going to have a good fourth quarter

Yes, certainly implied by guidance. In the facility services margins, and an earlier question alluded to that. Is the swing from where you were a year and a half ago to where you are now, is that mostly the negative mix shift from weakness in refining or is there anything else going on there?

It is primarily that. We talked two, three years ago, or closer to the acquisition date of those assets. We talked about the transformational impact that those assets could have on our OI performance although the revenue impact is not nearly as great. Those assets continue today to be accretive in terms of their OI performance to the rest of the company. They are just earning at lower rates than we surmised when we acquired them, and in indeed, rates they performed at for awhile after the acquisition. And so what we are saying today is that this write-down, which I regret, is not reflective of the reduced quality of those assets or an impairment in their future earnings power. It is a reflection of the long-term recessionary impact on their markets and uncertainty about the pace of recovery of those markets.

What should we look for the markets to rebound? Just refinery utilization rates?

Well, it has to do with overall economic activity levels. It is fundamentally, it is a question of demand for gasoline and plastic bags. And if and when those improve and they will, I think tied somewhat to general business activity to the rate of employment, and overall customer demand and purchasers confidence. I think that means we will have a pretty good, maybe really good spring turnaround season in refining and pep-chem and move on from there. It is quite a seasonal business in that respect. Spring and fall turnarounds give the largest opportunity for both revenue and margin.

Since you mentioned it, I am curious, what is giving you the confidence that the spring will be good and of course, I am asking this in the context of it is springtime, everyone says fall is going to be good--

I think you partially got the line from us, right? We told you when it would happen, it would happen--

Right, I have heard it from across the industry in terms of anyone exposed to the refinery turnaround

We think it is, but I think what we have said consistently is, I think this time we will wait to report the numbers and tell you that it was a good spring turnaround season because, you're right, we are going on three different turnaround seasons between spring and falls where the industry basically let us down and our customers had everybody geared up to work and the work then was not there, it was descoped, really within the red zone.

But are you hearing from clients --

We are hearing the same things are happening. Are we going to have enough welders, are we going to have enough electricians, are we going to have enough pipe fitters? We heard the same noise last year.

Right, I appreciate the color. Frank, I appreciate the time you spent with the investors, educating them about the industry and the Company.

Thanks very much Avi.

Your next question comes from the line of Richard Paget with Morgan Joseph.

Hi, Rich.

Frank, you will definitely be missed and perhaps if Kevin gets out of line, you can make some special guest appearances.

I would be happy to, thank you very much.

Wondered if you would talk a little bit about any of your government-related exposure. I know with Harry Peppers added in, you think that is a good area to invest but there have been some bare cases that there is going to be some belt tightening. You have had success in BRAP, but with that winding down, given that we are going to know the results of the elections tomorrow, how should we think about your exposure to federal budgets either going up or down or staying neutral?

Tony has a strong military background and I will ask him to chime in a second. I would just say that my own experience including participation in aspects of the defense industry, suggests to me that the most significant areas of downturn in military expenditures are likely, I believe, to be in weapons systems and major capital projects and not in the kind of maintenance and on-going base operations projects that we are primarily involved in. Tony?

Yes, Rich, we pay a lot of attention, Richard, to what the long-term viability of the facility is, either we are maintaining or we are going try to win the contract on. If you look at our contract mix, it tends to be in the, what I would say, the legacy facilities that we are pretty sure are always going to be part of the mix. And the kind of things we do on those facilities are things that need to be done when they are occupied. We were never big participants in the overseas work, especially with respect to Afghanistan and Iraq, we were no participants in that. We really -- we do not do anything with weapons systems, we do not support facilities or do anything with weapons systems. We think we will be relatively stable, and the work that we have won in the government's base has not been because of stimulus or other things like that it is because we won new contracts and we have had good reputations with customers and we are able to offer best value to the government. It hasn't been because the government in any area has decided to start spending more money and we have been big beneficiaries of that.

Ok, and then kind of along the same lines in the UK business, margins were a little bit lighter and there have been headlines about osterity measures over there. What's the net impact on your business going forward?

I think first, we should call it a little bit about what our UK business is. It is almost two-thirds to three-quarters facilities work and services work and only one-quarter construction now. Most of the headlines are the osterity will impact our construction business which is a much smaller part of it than it has ever been. What you see there is basically just a seasonal adjustment, we had a great Second Quarter, we closed out a contract that we had negotiated very well, and in this quarter, it is just a third quarter the way it is with really nothing going on. And it will be a little bit lumpy like that sometime in the UK as all our operations are. The difference with the UK, and even Canada is they are out there on their own and so the quarterly performance and what is a relatively medium-sized business is fully exposed to you all.

Rich, this is Mark. On a year-to-date basis, our UK business is at 3.3% operating margin which from a historical context is performing very, very well relative to what it has done in the past.

Ok. But given the environment and the potential for increased competition, just as more companies chase even [indiscernible] work as well. Is that level sustainable at least from what you guys can see?

Well, we continue to work on the cost side of the equation, and the productivity side. We face more competition just like we do everywhere else in this recessionary environment. And part of it is just being very careful about the kind of contracts and work we enter into.

All right, thanks, I will get back in queue.

Thanks, Rich.

Your next question comes from the line of Tahira Afzal with KeyBanc capital.

Good morning, T.

Good morning, gentlemen. And Frank, again, thank you for all of your help during the last few year, and obviously you have done a commendable job beating the pants off a lot of your [indiscernible] the larger blue chip name, so congratulations.

Thank you very much.

And best of luck, Tony, you have big shoes to fill in. Just wanted to -- had a couple of questions. Number one, with the impairment charge taken, does that change any of the amortization schedule you have going forward in the facility services space?

Mark's got that.

Now T., the charges taken to date and the year obviously in this quarter and last quarter are related to, as Frank has indicated, trade names and goodwill which [indiscernible] are not amortizable so the amortization schedules as set when the purchase price allocations for all of the businesses acquired will remain the same perspectively.

Got it. Okay. And then the second question I had was Frank, you have talked about how the different -- fundamentally why the commercial market is sort of, still soft but perhaps bottoming out. A year back, if you compare, would you say it is now more just the credit markets coming back that is holding back the market, versus last year, fundamentally as well, maybe demand was weak? Because if you look at the ABI index, it would seem to suggest the underlying demand seems to be stronger at least on the front end activity.

Yes, T, I do agree that the ABI both in terms of the new inquiries and also in terms of actual architects' work and, for those listeners that do not know what we are talking about, the ABI is a measure of architectural billings that is taken by some watchers as indicative of construction activity nine to 12 months down the line and it has recently turned positive for the first time in several years. There was another report, the Census Bureau report concerning construction put in place, and there is a new report on construction starts. All of which are suggestive of the possibility of turnarounds starting with residential construction which has been at a very low ebb, we all know, for a very long time. And the growth, at least suggested by the Census Bureau numbers is primarily in residential construction at least for the short term. But I do think that it is right to think about an expansion as a follow-on to residential construction improvements. First of all, in commercial facilities and certainly in public sector facilities to serve new residential developments. And so I can take limited confidence from the very good ABI numbers and especially the very good residential numbers that we are beginning to see.

Got it, okay. And Frank, just a follow-up on that. If you do see the residential side picking up after some extent in 2011 versus 2010, does that take away some of the non-traditional competition that might have impacted the lower ends of your market?

Probably to a minimal extent, I think. EMCOR thrives on difficult, complicated, expensive projects for demanding customers. And the ability of most residential contractors to attack our markets has been really limited because the skill level of our personnel and the complexity of our work is pretty far above what most residential contractors typically run into. Codes are different, construction quality requirements are different, and so they have had limited impact. Maybe on the low end, maybe on some very simple and straightforward repair and refurbishment projects, yes. Otherwise, I would say no.

Got it, okay. And then last question is again, in regards to the refinery business, we have seen the maintenance oriented names in the US now indicating that even labor prices are perhaps bottoming out, at least [indiscernible]. Are you seeing that as well? At least on the labor side that things are stabilizing?

Oh, sure. We are, absolutely. And we are seeing demand for crews again. We had the same demand last spring and it never executed, so, we are hopeful about the spring turnaround season. But I think this will be one of those ones we will declare victory when we have actually had it.

Fair enough, okay. Thank you very much and Frank, best of luck.

Thanks very much, T. So long.

Your last question comes from the line of Jeff Beach with Stifel Nicolaus.

Good morning. Frank, congratulations on a great 16 year record with EMCOR.

Thank you Jeff.

I have two questions. The first one, going back a number of years ago, when analysts and investors on the calls were asking about what kind of margins you could make in your mechanical and as the cycle matured and you were talking about 5% or better and you are headed towards what looks to be maybe an all-time record this year at 6.5% in the recession, what has changed in the mechanical business you have done over the last four or five years including, is there a change in the amount of equipment and materials that run through? Is it the nature of the projects? Can you give us some color on these fantastic margins you are achieving?

I will speak historically very briefly and then Tony will pick up, Jeff. You, as one of our old-timers, will remember that some of the very significant OI percentage problems that EMCOR encountered in the last recession were due to poor performance in our US mechanical sector. And we, in fact, revamped management at that time and we are very grateful for the efforts of our senior management personnel who took over the mechanical segment and changed its policies, changed its methods of doing things and in fact, used the operating principal that it made electrical such as significant performer for so long to bring mechanical up to that level. So, we were at one time a company that had problems performing on the mechanical side whereas you correctly point out, there is a higher proportion of equipment and material handling as part of the cost of construction than there is on the electrical side. But we think that we made vast strides since those problematic days and as you say, mechanical has really found its strive now and it is performing very well. I will ask Tony to comment in detail on that.

A couple of things, Jeff, if you really take a macro step back, first is, we changed management at the senior level. We also had some very well-timed and well-placed management changes at the subsidiary level. There has been a lot of discipline brought to the organization at multiple levels in it. And the team there has done a great job of doing that. I think there has been some structural changes that will be long-lived in how we do business.

Not only from the discipline standpoint, the mechanical segment, we got on the front edge, not the bleeding edge but not on the front edge of what was happening with changes in construction methods, for lack of a better word. So, we became early embracers of them. So, we look at the healthcare back-log today. I do not think we would be as excited six years ago as we are today about having the healthcare back-log because now with BIM, building information modeling and our ability in there, in our ability to share resources across the company, to have these models and drawn correctly allows us to play a significant role in the coordination of the trades.

Which, therefore, then allows us not to have some of the problems that we have had in the past poorly designed structures, we can correct the design before we ever go out and build it. I think that the development of prefabrication techniques and our willingness to really press the envelope there with our partners in the labor trades and to take advantage of the prefabrication techniques so we can take the work off the job into a controlled environment into the prefabrication shops whether they be set up for large job specifically or in our shops, has been a big deal. And I think mix helps.

Especially, as you look at labor productivity. We always will be a small project company. But we have shown the ability to do some of the larger projects well and that mix allows us to more level load our resources and get the cost absorption we need on our overhead that probably was not there before.

So, you put very good management--or, excellent management at the top level with our construction folks, the discipline that gets filtered down and with the ability to try something new and have it succeed, we think you put all of those together, I think that is good and I think sometimes the best job you win is the one you did not win and the bidding discipline underlies all of that.

Thanks for a good answer on that. The second question I have is in the refinery services which sounds like it has been in deterioration for awhile. Are you still adjusting for seasonality? Are you still in a downhill slide in the refinery business in terms of your profitability until you see some sort of a turnaround or pickup?

My take right now, Jeff, is we are at the bottom and we have been there for about four quarters. When you look year-over-year and what we expect and what spending levels are with our customers. We have done the restructuring quite a bit of it to get us to the level to remain profitable. Our team has been ahead of that. We maintain the capabilities we need. But we think we can operate profitably at the level we are at. And we think we have maintained -- and we have also done some pretty creative things in our shops so that when demand comes back, we invested in productivity here at this downturn so we expect to see, although pricing may not come back as quickly, our productivity should be a lot better to allow margins to expand.

All right, thanks a lot.

Thank you, Jeff.

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

Thank you, all, once again. Both my team in the room and all of you out there in radio land for an interesting, exciting, and fun 16 years. Thanks so much and watch this space for interesting developments to come. So long.