EMCOR Group Inc (EME) 2010 Q4 法說會逐字稿

Good morning. My name is Valerie and I will be your conference operator today. At this time I would like to welcome everyone to the EMCOR fourth quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise, after the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Eric Boyriven of FD, you may begin your conference.

Thank you, good morning everyone and welcome to the EMCOR Group conference call. We are here to discuss the Company's 2010 fourth-quarter results which were 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 fourth quarter of 2010.

First, a little house-keeping.For you long-standing listeners, you must have noticed that we did not issue our 10K this morning as has been our practice. Sorry about that. Our XBLR tagging is taking us a little longer than we anticipated. That being said, we expect to have the form 10K issued sometime later today, or early tomorrow morning. In lieu of the 10K not been issued, we've concluded the cash flow statement and statement revenue of operating income tables to the end of our release. So please take a look.

For those of you who are accessing the call via the Internet and our website, welcome and we hope you have arrived at the beginning of the slide presentation that will accompany our remarks today. Slide two depicts the executives who are with me to discuss the quarter and full-year 2010 results. They are Tony Guzzi, our President and Chief Operating -- Chief Executive Officer -- sorry. Mark Pompa, our Executive Vice President and Chief Financial Officer, Mava Heffler Vice President of Marketing 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 website under presentations. You can get us at 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 at EMCOR management's perception of this date, and EMCOR assumes no obligation to date 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 the 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 market for EMCOR services, adverse business conditions, increased competition, mix of business, and risks of associated with foreign operations. Certain other risks and factors associated with EMCOR's business are also discussed in the Companies 2010 form 10K which will be issued shortly and other reports filed from time to time with the Securities and Exchange Commission.

With that being said please limit turn the call over to

Thanks Kevin, good morning and welcome to our call. Today we will talk about our Q4 2010 results and our full year 2010 results. I will start the call with some general summary and comments reference our performance, Mark Pompa, our Chief Financial Officer, will follow me with in-depth financial review of Q4 2010 and full-year 2010. I will then return to the call to discuss our backlog, some progress recently won, and finally our 2011 outlook.

If you now go to page three and four that will form the basis of our remarks here at the beginning. As we close 2010, EMCOR continues to weather this recession in good form. We earned $1.82 per share on a pro forma basis, well within the guidance range provided on our Q3 earnings call of $1.78 to $1.90 per share. We have remained profitable, we continue to generate cash. In fact we generated cash at about 72% of net income when adding back our voluntary contribution to the UK pension fund. And we have taken very difficult actions to make sure our margins remain acceptable. Our operating margins before the impairment charge were 4.2% in 2010. We continue to execute well, despite a revenue drop of 7.7% in 2010. We believe that our markets have stabilized, as our book-to-bill ratio exceeded at 1.0 on an organic basis for the first time since 2007. We will have cut over $100 million in SG&A out of our base business, and that's before you look at the 2010 acquisitions since 2008. We expect the majority of this SG&A not to return as we begin to see increased demand.

Our balance sheet is exceptionally strong, with $711 million of balance sheet cash at year end and a debt-to-equity ratio of 11.5%. Our management team has remain focused on job execution, and remain vigilant in their bidding. Our US construction business has performed extremely well in this downturn. Our operating margins were robust for mechanical and Q4 driven by continuance release on our hospitality work, And excellent execution on settling the very difficult and long-term health care claim in California. Our facilities service segment has remain profitability, but has suffered from a lack of small private sector capital projects and a lack of demand in the industrial business, most notably the refinery sector. The lack of small projects and a lack of demand in the refining sector have pressured operating margins in the segment below our expectations. Facility services success came from our government, core mechanical services , non refinery industrial and site-based business all performed well in 2010.

Our UK business had a very good year with good results in our facilities business there, which counts for about 70% of our UK revenue now. Our UK construction business continues to shrink, as the market in the UK is very difficult for capital projects. Our Canadian business was about breakeven for the first time in four years. It had a good four-year run.It was driven by a single large industrial project that we had talked about in our Q3 earnings call. We had a significant loss there in Q3 and as we examined this project further in Q4 we took another loss of a similar size -- a little bit greater. We believe we have the loss contained. We have been off the job since the end of June, and we believe that we have done the exhaustive analysis necessary to arrive at the correct book position.

We have also recently had more success in the acquisition market. In 2010 versus -- in early 2011 versus 2008 and 2009. These acquisitions and struck at our mechanical service, government, mechanical construction, industrial construction/service business. We also the divested two non-core operations, our Middle East joint venture and our share of the District Chilled water plant in Baltimore Maryland. Our backlog grew organically year-over-year and some well-timed and priced acquisitions gave us entry into some new key geographies and market sectors. I will talk backlog in 2011 expectations in detail after Mark walks through the financials.

With that I will turn the call over to

Thank you Tony. For those participating via the webcast we are now on slide five. I will begin with a discussion of our fourth quarter results before moving to the annual period, based on information derived from our consolidated financial statements included in today's earnings release announcement. So let's begin.

Consolidated revenues were flat during quarter four, however there were several components evident. First, we continue to see weakness in our US construction business revenues as reflected by our mechanical construction services segment revenue down 5.8%, our electrical construction services segment revenues being down 2.1%. Which results in total construction revenues down just over 4% quarter over quarter. EMCOR's construction revenues continue to contract due to prolonged weakness in the US private sector nonresidential construction spending, especially within the commercial and hospitality -- sectors. Second, our United States facilities services segment reported 17.7% revenue increase. Which benefited from the impact of growth in our government services revenues, including incremental revenues from our acquisition of Harry Pepper in October. As well as incremental revenues from our Pittsburgh-based mechanical services acquisition closed earlier in 2010. Additionally, we experience modest growth across our commercial energy and industrial service portfolios during the fourth quarter. Third, our Canadian revenues continue to decline due to the continuation of challenging market conditions and the impact of project lay down's during the quarter.

The Company reported operating income of $68.4 million or 5% of revenues during the fourth quarter. When compared to 2009 fourth quarter results, it would be best to exclude 2009 impairment charge of $13.5 million, to arrive at $69.5 million of adjusted operating income or 5.1% of revenues. Which is roughly flat with our current year quarterly performance. As Tony indicated, our Canadian operations struggled in the fourth quarter and as a result reported a quarterly operating loss of $2.1 million directly attributable to the specific project write down mentioned. Despite the loss in Canada, our 2010 fourth quarter results reflect a contribution of projects successfully completed that were bid and awarded during pre-recessionary periods. As well as the favorable settlement of a multi year healthcare project claim and our US mechanical construction segments. Our income tax provision for the quarter was at an effective rate of 38.8%, and consistent with our expectations. Quarter four represented our strongest operating cash flow period of2010 with approximately $99 million of operating cash flow generated . Please turn to slide six.

With regard to additional financial data included on the slide not captured in the affirmation highlights, quarter four gross profit of $205.1 million represents 15.1% of revenues. Which is slightly down from the comparable 2009, but is sequentially up from quarter three by approximately 160 basis points representing our consistent project execution and the favorable impact of project close-outs. We continued our trend of reduced selling general administrative expense levels with quarter four 2010 expenses of $134.8 million representing 9.9% of revenues, and a $5.5 million decrease from 2009 comparable period. Restructuring expenses of $1.8 million were recorded in both fourth quarter periods. As we continue to adjust our footprint to reflect current demand levels. Diluted income per share for the quarter was $0.59 compared to $0.58 per diluted share a year ago. On an adjusted basis reflecting the add-back of the 2009 impairment loss previously mentioned, diluted earnings per share would have been $0.70 for the three months ending December 31, 2009. Please turn to slide seven.

I will now discuss the results for the 12 month period beginning with some highlights. Revenues were down 7.7% with by $5.1 billion with all recording segments other than US facility services generating revenues below 2009 levels. Our US construction business experienced the largest revenue declines, due to the continued weakness in private sector in nonresidential construction activity. In addition our international revenues reported an 11% reduction in annual revenues, as challenging market conditions persisted in both geographies. As previously indicated our US facility services revenues experienced modest growth during 2010 of approximately 2% which is primarily attributable to the incremental revenues of recent businesses acquired. Operating income excluding $246 million of impairment charges recorded during 2010 and $13.5 million of impairment charges in 2009, was down 21% to $217.4 million or 4.2% of revenues. Despite the reduction year-over-year we performed well in a challenging environment with strong operating margin contributions across all reporting segments other than Canada due to the reasons discussed earlier.

Total domestic operating margin of 6% represents a 70 basis point reduction from 2009. While international margins due to the impact of Canada are down 110 basis points. Please turn to slide eight. Canada's 2010 operating income of approximately $300,000 is due to the write-down in both quarters three and four of an industrial construction projects. Aspects of this negative project activity our Canadian operations performed well during the year despite difficult market conditions. We continued are prudence in adjusting selling general and administrative expense levels to be reflected of the reduce command core services resulting in a $45 million improvement over 2009 expense levels. EMCOR's 2010 results are reflective of our continued success in executing and completing projects obtained pre-recession and the favorable impact of the claim settlement. Our income tax for the full-year excluding the non-deductible portion of impairment charges recorded is approximately 37%. And operating cash flow for the year was approximately $69 million inclusive of the $25.9 million supplemental UK pension contribution, made during the second quarter. Very strong performance nonetheless. Please turn to slide nine.

Additional annual key financial data is included on this slide. Gross profit of $719.5 million or 14.1% of revenues decreased 80 basis points as compared to $824.9 million or 14.9% of revenues of gross profit in 2009. Restructuring activity for the year of $4.3 million is reduced from 2009 levels of $6 million as we continue to rationalize our cost structure. For the 12 months ended we are reporting an operating loss of $28.7 million. Adjusted for the add-back of impairment losses in quarters two and three, with results in operating income of $217.4 million or 4.24% of revenues. Which is approximately 70 basis points less than the $276 million of adjusted operating income, or just under 5% of revenues reported in 2009. Diluted loss per share for 2010 is a $1.31 as adjusted for both the impairment charges and the elimination of the gain and sale of equity investments during quarter two, diluted earnings per share is a $1.82 as compared to the adjusted diluted earnings per share of $2.50 in 2009. We are now on slide 10.

EMCOR continues to maintain a liquid balance sheet with cash of approximately $711 million and total debt levels of just over $150 million. Working capital levels continue to increase for the year in 2009 and you can see on slide 10, the results of reductions in goodwill and identifiable tangible assets due to the charges taken earlier in the year. Leverages represented by our debt to capital ratio remains modest at 11.54% as of December 31, 2010. Which is down from 2009 levels due to the debt repayments made during quarter one. Our balance sheet continues to be (inaudible) with modest leverage as we continue to evaluate strategic opportunities, in addition to our most recently announced acquisitions.

That completes our 2010 financial review and I will return the presentation to

Thanks Mark -- Thanks Mark. You should be on page 11 now and I'm going to talk backlog.

Backlog will set the stage for the rest of this discussion. If you look at our backlog in 2010 and we grew by about $280 million to over $3.4 billion from $3.14 billion at the end of 2009. About $200 million of that backlog growth comes from our acquisitions. That being said, excluding backlog associated with those acquisitions, the book-to-bill ratio, and this is an important number, was over 1.0 organically as we saw backlog grow in other areas of the Company. And it's really the first time since 2007 we've had a book to bill over one. We think backlog has passed its bottom and is slowly working its way up as the economy slowly gains momentum. From a market perspective backlog was up in all market sectors except hospitality and transportation. And some of these increases were off low basis. I mean, commercial is up 11% and that direction is encouraging, but the commercial market is still a stagnant market. For the year, backlog is it down in domestic construction, although we did experience low growth in domestic construction backlog from the third to fourth quarter. Offsetting the yearly decline in domestic construction, we saw increases in our services business and in our international businesses.

When I look at the backlog chart on page 11, what the chart says to me is -- we have resilient, agile, and focused Company. We went to where the best opportunities were. If you go back to 2006 and 2007 we see striking growth in hospitality. And we see these levels decrease through 2010 mainly at recessionary pressures as we've all know what has happened, especially in the gaming area. And we've executed extremely well. We've been able to replace that pure private sector hospitality and commercial work, with growth in healthcare, institutional, and water and waste water. And in fact as we report today, we have -- record levels of a backlog in those areas. With healthcare now being our largest sector at $900 million. Nobody is immune to what's happened from this depressed economy. But EMCOR has had the agility and skill to move from markets that are depressed or cooling, to markets that are growing and have some resiliency.

So we move from commercial and hospitality, and we moved into these public and quasi public markets like healthcare. And one might say, how worried are you at EMCOR about what is happening with the states and municipalities, and the federal budget? I will take a minute and talk about that. EMCOR does not derive significant revenue other than through funded projects, things like water and wastewater plants, transportation projects, from state and municipal budgets. Typically the institutional work that we do is either for the federal government or for universities -- and things like that. When you go to the federal nature of our work, we've taken share in our government business because we perform extremely well. And one could argue that the budget pressures that Washington is under should help our government maintenance business. Because the recent activity when the old Congress came in 2010, they stopped a lot of outsourcing projects that were cost effective for the government, because they wanted to maintain employment levels. I expect that to reverse and that did impact EMCOR. If you look at the kind of construction work we do for the government, a lot of it is it revenue generated or it's meant to do cost reductions. Like the work we do with the base-realignment commission or when the troops are coming out from overseas. So no one is immune from what could happen but we are not as dependent on state and miniscule budgets as other people in the ENC space. Further to our strong backlog position today we made a couple of acquisitions in the back half of '10 and early '11 that opened new market sectors to us or strengthen market sectors that we have.

Harry Pepper is an outstanding DOD core of engineer contractor and the work is vital for the restoration of the Everglades, and again, flood control and things like that. Again, a market that we were in, but a market that Pepper puts us in, in greater stead. The same thing with Bahnson. Bahnson gave us more nuclear capability, and Bahnson also open up the department of energy sites where EMCOR really, had no presence. I will say more about Bahnson as I get further into this presentation. One of our -- issues we need to work through in 2011 is private sector backlog burns faster. And it typically has slightly higher margins, or higher margins than public sector work. And because, the bottom line is, to think about it from a selling perspective, we can up sell in the private market. We get paid to get them faster, we get paid to offer great recommendations on value engineering, we get into shared serving arrangements, and people really value our efficiency. [illustrating] at this point is comparing 2006 and 2010. You may be tempted to take the 2006 numbers and the backlog is about the same as 2010, and say well, in 2006 the backlog was the same, their 2010 backlog is the same, 2007 revenues were about $5.9 billion, why aren't 2011 revenues about $5.9 billion? The mix that we have in backlog today just burns slower.

Now, granted we have a much bigger maintenance business and that's how we get to what our guidance at the end of this call. It's very hard to compare a non-recession year like '06 with what we have gone through in '10, but I just wanted to make that point that the pace and timing of the broader private markets is a really important point for EMCOR as we move into 2011 and beyond. An additional point is that Pepper and Bahnson are great ads to the EMCOR family. And we are real excited from an earnings per share perspective what they're going to do for us in 2012 and beyond. In 2011, the kind of business we bought with Pepper and Bahnson that were very backlog dependent have very significant amortization charges in the first year, and you really don't get a lot of the EPS impact. So I feel good about where our backlog is, we have done the appropriate thing with bidding. We've been able to show agility and moving between it, and you will see that as we go to page 12 and talk about specific projects.

As you turn to page 12 you will find the first three projects this quarter our healthcare projects, and we're good at healthcare projects now. Why are we good? They're complicated, we can differentiate ourselves with building information modeling, and we can bring great prefabrication techniques and learning across our portfolio. We really try real hard not to make the same mistake twice, or better yet when we are really finding something that has efficiency and expands our margins we try to spread that like wildfire through EMCOR. So this first project is the Children's Hospital in Boston, where JC Higgins will be installing the HVAC, plumbing and fire protection sprinkler systems. And their new 100,000 square-foot 10 story addition. This is a long-term EMCOR customer for JC Higgins and it's also a long-term EMCOR service customer. Our service company and JC Higgins in Boston are the healthcare vendors of choice, and partners of choice, when it comes to mechanical systems. To come a little further south here in Bridgeport Connecticut, probably the hospital that Mark I would go to if we needed, in St. Vincent's -- we performed some work in 2009.

Tucker has a long-term relationship there and we're continuing through the renovation phase, by installing new piping, insulation and HVAC systems, as well as plumbing and fire protections. Again, we are known as the go-to folks in Connecticut for top hospital construction. We get out to Arizona our university mechanical operations is installing the HVAC building control plumbing laboratory piping, for the new College of Meta pharmacy and Medicine at University of Arizona. If you get down to Florida, PPM industrial services, this is the part of the industrial space that has continued to do well. The sort of meat and potatoes power plant, process plant work . We won a five-year contract to provide year-round services 24/7 for the Seminole Electric Proper Generating Station, and at that plant we've got a terrific safety record. Many years with zero accidents. We will maintain two 650 mega watt coal fire boilers, as well as be responsible for the operations and maintenance board for the Gypsum plant that goes with it that operates 24/7 throughout the year.

And in 1992 EMCOR UK, and again our facilities business is doing very well in EMCOR UK, and the foundation of that business back way back when, when it was Drake and Scull and not EMCOR UK, was really British Airways when it was going through privatization. We have been continuous with them and we have the privilege of being able to serve them for another three years to include the facilities management on their new T5 terminal. We do everything for them across 75 buildings. It's a 20 year relationship, it's been a lot of learning with us and British Airways, we value them as a customer, and it's been a traffic job by our team in UK to keep a 20 year customer. And as you come closer to home here in San Diego, California, this is building on energy efficiency theme, we are providing full-service electrical instrumentation and controls work or 144 mega-watt power generating facility in El Centro. We are basically replacing an existing 40 mega-watt steam boiler with two steam and gas turbines. You will see more of that work as gas is more available and the price point is just about right. I think everybody knows EMCOR really rides the energy efficiency wave on a number of ways and it's a good long-term trend for us. And finally, down in Texas, Gowan which is just a great subsidiary down there in Houston that has, really service, controls, commissioning, and a good mechanical contractor is doing some work for the Texas Department of Corrections where they are putting in some new HVAC systems for the textile mill where the prisoners make their own clothes.

With that I'm going to talk about Bahnson a little bit on page 13. We (inaudible) with Bahnson here in February 2011. It's a Winston Salem-based mechanical construction, mechanical service, industrial construction service company. Bahnson was bought for the simple reason is that it provides market access and it's a good company with good management. The market access that provides EMCOR is there's more nuclear work, power work, pharma-work, and industrial markets. With large clients like the Department of Energy sites in Savannah River, Hanford, and Idaho Falls. It has a traditional regional mechanical footprint in the Carolinas ,where we lacked one. And has significant expertise environment in air purity and clean room environments. And that's something we do well. And we want to expand it. It's 2000 revenues were around $150 million and it brings a contract backlog of about the same. It's backlog was not reflected on our previous backlog discussion, and the way I look at this acquisition for EMCOR, new markets, great company, good and focused management team, and margins that are accretive to EMCOR overall. With that, I will ask you to turn the page 14.

I want to set a little backdrop for our guidance discussion on page 15. As we look to give guidance reference our 2011 expectations, I think it's important to talk about some general trends and then drill down to how they effect EMCOR and its opportunities. Private sector nonresidential markets are still under pressure. Especially the commercial and hospitality markets. As we discussed in detail through our backlog discussion. The economy is moving in a more positive direction than it has at this time in either 2009 or 2010. And to remind everyone EMCOR is emphatically a lifecycle Company. We have done some things to make it a little earlier cycle, with some of the service offerings. But, we still get a chunk of our revenues, the majority of our revenues and our earnings, from the late cycle attributes of the economy. We still see our private customer -- private market customers are still reluctant to spend. And they still have an eye towards cash conservation. It's been all over the press. It's what everybody is talking about.

How much cash is on Company's balance sheet. We are seeing a trickle of that coming back in , we are seeing a trickle of capital come in, but they're still great uncertainty around regulation, around taxes, and all the things that affect Company decision-making. The good news is, we are in those discussions with our customers when they let the capital go. The bad news is, they haven't pulled the trigger on a lot of capital projects and small capital projects that we know that we can help them with. EMCOR in 2011 is a story that pace and timing of the general economic recovery, especially as it relates to the private market. We have the mix where we will be [exing] more public and healthcare and quasi public work then private work. This backlog burns slower and the margins are generally lower for two reasons. The market we won this work in, for the most part, was a recessionary market. And we did a great bidding, and we were diligent in what we bid, but it was a more competitive market. And we have said that. And the opportunity to up sell our customers in this market, the public and quasi public market is more limited. We do see improved demand in the important refinery sector. It is better, although it is coming from a depressed level. And we have a balance sheet that we built that is strong in liquid. We continue to look for the right acquisition investment opportunities.

We've had some success in late 2010 and early '11. And we are seeing increased activity compared to what we've seen for the kind of opportunities we look at, at EMCOR than we've seen at any time over the last 24 months. And we've had some success . Again I will go back. It is always important to remember that the majority of EMCOR's earnings and revenue still come in the later cycle of the economy. We also wont be the first out of the gate, but we should be out of the gate much quicker this time, than past recessions. We've cut $100 million of SG&A out of our business and we think that is a sticky on its return. In fact we think the majority of that SG&A wont return. And because we have lowered ourselves down, and we had the courage to shrink backlog and revenues in this recession, we will have the capacity to react much more quickly to better opportunities. We come out of this recession leaner and more efficient with the cost structure. And what we need is a little wind at our back from our recovering economy at a faster pace for private money, and we are going to perform very, very well.

Now as you go to page 15, when you factor that micro-view that I gave you with our current backlog, the heavy amortization from acquisitions in the first year, we are left with operating conditions that on balance are very similar to last year. We have less work to execute than we want in pre-recessionary times. We have less private sector work, which allows us to up sell our customers. And we have a mix that is generally weighted more towards the public sector, which is slower burn unless opportunity to up sell . We did turn the corner on our bookings in 2010 for the first time in two years. Since 2007 we had a book-to-bill over one. Therefore, we have the same guidance as we did last year, and I will walk from the bottom of the page to the top on page 15. Our guidance, our initial guidance is a $1.45 into a $1.85 per share. Our operating margins were 3.25% to 4%, very good performance in what we consider the trough of the market. And our revenues are between $5.3 billion and $5.5 billion. We are going to generate good cash and we do see some glimmers of hope in some markets. And we do see improved demand at least through the first half of the year in the refinery sector.

And with that, I'll turn it back to Valerie, and

Thank you Sir. (Operator Instructions)

The first question will come from the line of Alex Rygiel of FBR.

Good morning gentlemen.

How are you?

Pretty good. Three quick questions. First, on the refining market can you remind us, your largest customers in that segment? And comment on your expectation of the near-term turnaround season in the Spring?

Okay, in the refining sector our largest customers are the large refineries. We do work with the big guys especially on the Gulf Coast. Our mix is about 75% Gulf Coast, 25% West Coast in the Rocky Mount region. We do shift heat exchanger's through Latin America to some places that require -- the engineering and skill that ours have and we typically do that because we are the best at it for their application. But again, the bulk of our business comes from the Gulf coast. We are with the big integrator's. And we also have good business with one of the big independents, Valero.

And, as it related to your divestiture's, could you comment on any gain on sale our loss?

Alex, this is Mark. Basically we had a couple of operations that were shut down, the resulting impact of that was a minimal loss. There was no gain. We just had to vacate some real estate.

And was there any negative drag in your 2010 profitability from those operations, that won't be repeated in 2011?

It's minimal, those businesses basically have worked out there backlog already. So it's obviously a exit costs for, like I said, real estate and some minor employment costs.

Sure. Can you comment a little about your cash use going forward, really you got a lot. Any idea or thoughts on stock repurchase dividend in addition to your acquisition strategy?

Yes, I'm going to start this, Alex, and I will ask Mark to kick in here. First of all, we are more bullish today on being able to make accretive acquisitions than we were any time in the last two years. And as you know, we've had great success building the Company that way and you know the markets that we like there. We basically have shown that over the last four months of the markets we like-- or over the past year. So, we see opportunity there. That being said, I think it's a fair question to say, how do you think about capital structure? And I would say that it's something our board looks at very, very intently. And it's gone from a conversation a couple times a year to a conversation at every board meeting. I think Mark can walk you through how we think about that and then we will be happy to answer other questions on that.

It's obviously, our capital structure is a primary conversation. I think, clearly, we've demonstrated through, at least the recessionary period, that we are exiting and unfortunately somewhat continue into 2011. We continue to generate very good operating cash flow albeit working from a sizable cash on hand balance to begin with. As Tony indicated -- we have had some success with that over the last few months including some strategic investments. And we continue to actively look for those opportunities to either expand our service portfolio or two access the markets that we currently have a significant presence. Having said that I think one of the concerns that we have disclosed on this call in the past is that, when in our business is in a recovery mode we are going to become more users of working capital than we been over the last few years.

Once again, that depends on the pace of recovery and obviously where those incremental revenues are coming from, within what segments. Having said that, we have sufficient cash on the balance sheet we obviously have on tap and have credit availability both with in the framework of existing debt agreements and anything else we wanted to go. Our comfort level really is about $300 million of cash on hand. We are in excess of that but a portion of a reported $700 million of cash is outside of the US. And unless the government does something with regard to stimulating some (inaudible) of foreign earnings, I'm not that anxious to bring that money back. So, it's in essence, not usable per say. But like Tony indicated, we are continuing to evaluate. And I suspect it's going to be a topic of conversation going forward for the remainder of 2011.

Very helpful. Thank you very much.

You're welcome.

And the next question will come from the line of Rich Wesolowski from Sidoti.

Thank you. Good morning.

Good morning Rich .

Just on the back of that last discussion, would you mind reminding us, how much cash you need to run your business and maybe write the appeal of the options considered to deploy the excess balance?

Well look, Mark just gave -- he said we like to have $300 million of cash on hand. We have a surety line. That we need to show immediate liquidity for. They like us to have a certain amount of cash. We have ongoing working capital needs. We look at project sometimes, and we sit there and think it's a good feeling to know that we would be able to respond quickly with the right amount of working capital.

So, if you always think about what we would like to do to grow the business, well the first thing we would like to do is what you can invest in organically to grow the business. And the beauty of our business is we can do lots of experiments with organic growth, they don't cost us a lot. And we do that every day, and we have relatively modest capital expenditures. Like one of the things we did in this downturn, is we -- really took the opportunity in our industrial business to really get more productive. So that when demand comes back, even if pricing doesn't come back a strong for some of our services in our shops, we should be able to, as we absorb labor hours, gain very good margins. So that's an example one of the things we did with cash. At the or organic basis, we put in a monitoring center in Phoenix. And again, we couldn't possibly use $700 million of cash doing that. But that's my preference always, never run out of good ideas to invest in your business on an organic basis.

The second thing is we like to grow through acquisitions. And I think were known as careful acquirer's. And we're going to keep that reputation. It would be always our preference to continue to expand our service offerings to our customers, continuing to expand and grow businesses within what we know how to do. And we've been fairly disciplined in doing that over a long period of time. The third thing is then you've got to look at your capital structure. And I think you get into at discussion then a dividend and buyback. We spend a lot of time educating ourself on that. We understand that can be a value enhancement lever. And it's something that we take seriously knowing that we always consider ourselves a great Company that we should look at. And so the preference would be organic growth, second preference is a smart acquisitions, and then I think you get to the questions of capital structure and dividend.

Okay. I appreciate the detailed response. It's helpful. Tony is it appropriate to assume that the company's approach to setting guidance has not changed now that you're the CEO?

No, it hasn't. I set guidance with Frank for six years. So --

Okay. And then, finally, if you look at that 2010 backlog the healthcare market really shouldered the load as the office and the hotel pipeline shrunk. Would you discuss the structure of those contracts, the sophistication of the owners that gives you the confidence that the results from today's healthcare backlog are not going to resemble those of the K-12 education lifecycle.

Well first, is how we performed. We look at every job, we look at every sector. Our performance has been very, very good. It's been very good. The other difference between those and K-12 schools it's something that's not obvious. The hospital is a big complex system . So by it's nature there's only so many contractors in a market that can do that work.

And so, a lot of times what you're doing is in a healthcare job especially significant healthcare job, is your working with the customer to say this is what we can do for you with the budget you have. And these are the choices you're going to have to make. A K-12 school is in a lot of places, -- somebody has a brother, that's on the school board, that has a brother-in-law that's a plumber and he decides now he can do a $4 million school. So the scale and scope of these jobs for the most part are completely different. And we also have done a lot of institutional learning on healthcare jobs, specifically on as it relates to 3-D modeling. And what's unique here is, we find ourselves, especially as the mechanical contractor, as really working with the general contractor on the management of all the trades and the timing. That sounds like a small point, but it's a huge point. Because it keeps us from stacking trades on the job and it keeps us from wasting labor. And what we find when we can play that role with them and we can get more work off the site and prefabrication going all the way back into our vendors, and having them put some assemblies together for us instead of us doing it on site. It allows us to over-perform on the labor side.

So, a job where we thought we might have peeked at 200 labor pipe fitters we may now peek at 140. And these contractors typically are a combination of either fixed price, or the bigger jobs your working to what's called a GMP, a guaranteed maximum price. So there's a lot of visibility with the fee, and then we have a shared savings target. So it's much more on these healthcare jobs that you're working in partnership with both the general contractor and owner, then you are working as a typical sub doing a piece of the job as you would in K-12

Appreciate it. Best of luck in 2011.

Thank you.

The next question comes from the line of David Wells of Thompson Research Group.

Hello, good morning everyone.

Good morning David.

I guess, first off, looking at the fourth quarter can you bucket out the benefit you saw from the settlement versus the pre recession work that you are working from your backlog's?

If you take typical margins that we've been performing, which I would say have been outstanding in this recession of north of 6% for our mechanical construction business. You would say in the fourth quarter about half of that would come from the settlement, and about half of that from some work we closed out earned in pre-recessionary times.

Good. That's helpful. And then looking at the backlog that's left, is that the tail end of some of that pre recession work? Or should we expect a little bit of that benefit to continue into next year?

Well, we've got to finish the hospitality work and some of that may go in. But we have a lot of work to do there, we are in the process of finishing some of it, commissioning. And of course we have to get through audits with our customers on some of these jobs.

Looking at SG&A in the quarter, it picked up from the quarterly run rate we have seen earlier this year. Any thoughts on -- is it that a sustainable way to think about the cost structure going forward? Or is there some discreet items coming through the fourth quarter versus earlier this year?

Mark, go ahead.

What was discreet is we had some significant professional fees come through in quarter four related to all the activity around the impairment charge that was taken in quarter three. As well as incremental SG&A from acquisitions closed in the fourth quarter. Traditionally if you look year-over-year, quarter four tends to trend up historically because for those businesses that actually outperform in quarter four, there's incremental incentive compensation accruals that had to be provided pursuant to the terms of our bonus plants at the operating company level.

When I think about it we peaked about $580 million in 2008 . Our run rate before the acquisitions was about $480 million. Acquisitions while the little bit margin benefit that we will see up in the margin line and EBITDA line for a while.And that's one of the reasons when you go to the margin guidance, folks, we are going to get revenue and EBITDA without a lot of operating punch from those acquisitions here in the first

That's helpful. And just looking at the acquisitions that you've done more recently, it seems like certainly more of a public market exposure level. Just trying to understand the thinking behind that given that -- as you talked about already today it's a more challenging market from a margins perspective. Is that more you saw some right opportunities in the opportunity to get into some markets that you're not in currently? And as you look at the acquisition pipeline going forward, are you still looking to increase that public sector exposure or are there some more opportunities on the private side that you're seeing?

In these two specific cases, Bahnson and Pepper, one have brought us market access that we didn't have before. And it doesn't at margins that are accretive to EMCOR. Not all public work is lower margin than private work. It's just on balance if we have a mix that's heavily more weighted toward private and hospitality and industrial, we tend to have higher margins. And it tends to be quicker burning so we can execute faster and absorb our overhead faster. Some of the most successful jobs we've ever done at EMCOR have been in the public sector. And with the acquisitions we just made, we think they have good positions and good markets that will allow us to earn margins that are accretive to ENCOR.

That's helpful. Things for your time.

And the next question will come from the line of John Rogers of DA Davidson.

Hi and good morning. Tony, you said this number but I want to make sure I have it right. The organic bookings were how much in the quarter?

We -- the --

You said it was positive.

It's about 101 -- or so -- 1.1--

1.01?

Yes.

1.01?

Right.

Okay thanks. And then secondly, in terms of the -- commercial hospitality business--commercial and hospitality business that you talked about and that's still sluggish. Are you hopeful that we are ever going to see a rebound in hospitality? Or is it have to be commercial? And at what are the sectors or segments that you are thinking about as an opportunity there even if it's a very late cycle.

John I can go to dark place, I think ever is a tough word. I think someday we will see a recovery of hospitality. I don't think in this planning horizon, that we are likely to see a hospitality spike like we did in '06 and '07. And by planning-wise the next two or three years. I do think that commercial and industrial, which are also good sources of private money we will pick up.

Let me tell you why I think that, and especially on the industrial side. We are starting to see some pretty interesting opportunities as plants move around, and they re-stack. And you are starting to see work come in to the US, and some higher-end manufacturing we are seeing expansion in capital. I also think that were with that right customers on the process industry, these are plants you can't move, to really seek and gain efficiency. And then on the commercial side I think the energy efficiency story starts to take over again. And I think the data center business, it continues to be strong across all sectorsAnd I think that the re-stacking of buildings is going to happen. We are seeing glimmers of that in New York City now, as people take better space for less rent.

So, do I think that, as much as I would like to say I'd really hope we would see a big surge of building in Las Vegas in 2011 or '12, no I don't see that .

Okay. And those opportunities that you are referring to are not any specific project, but could they replace what you were doing in hospitality?

Yes, I think the way they replace it is, we continue to get legs in industrial. And if you look at the acquisitions we made we are starting to gain ourselves more exposure to sophisticated markets that require things that EMCOR does. And we see good legs in healthcare and data centers of for the next two or three years.

Okay. Great. Thank you.

The next question will come from the line of Tahira Afzal of KeyBanc.

Good morning gentlemen. How are you doing?

Good T. How are you?

I'm doing fine. A couple of questions. If you look at the continuing health resolution that was just announced, there's 60% cut-in funds for water treatment plants, et cetera. And for anything water related. And number two, there seems to be a material cut for GSA. And so as you look at your exposure, I would love to get some color there in terms of backlog exposure you have. And really what your strategy is given that these cuts seem likely to go through now.

Well we feel good about the backlog that we have . And a lot of our water work is focused on things that protect the environment and I'm not sure those got cut. I mean we're going have to see this work its way through. I'm not going to profess to be -- know all the impacts. But, the kind of water work we do, is either -- is usually guided with the revenue bonds or it's doing things in the Everglades that have to be done. Secondarily, when you look at the GSA work we do, I mean they are a big customer of ours, there's no question. We've had some success over the last couple of years and our strategy for that is to do what we've always done. Continue to get more and more efficient, we gained share in what's been a really difficult market for the last two years for government outsourcing, with some of the labor policies of this current administration. And we think -- we are hopeful over the next year or two we would be able to offset some of the invariable cuts with GSA with increased access to some of the outsourcing that the federal government was well on track to do until the 2010

Got it. Okay.And the second question I have was more micro. Could you comment on how much of the fourth quarter awards was acquisition related versus organic?

About 85% to 90% of it was acquisition related.

Okay, that 200 -- that $200 million from Pepper was in the fourth quarter.

We didn't give you a lot of detail on that, if you want to follow-up on that.

As I think Tony mentioned we did see organic growth in our domestic construction sector business from the third to the fourth quarter. It wasn't tremendous but there was growth there and that's encouraging.

And then, if you look at the book to bill organically for the whole year, that was the first time since 2007 we've had that T.

Got it. Okay, excellent.The second question I had was in terms of your facility services margin. And if I look back it seems you've done really well with 6.7% in '08 and then it lingered at 4% now is below 4% in 2010. If you recall and we rewind back a couple of years these were the margins that was supposed to hold out it seems like the refinery business being weaker. Where do you see these margins going and why have they not held up as well as you thought?

They are certainly not acceptable where they are right now. I expect that business to be comfortably mid-single digits. And can get back to 2008 if we get some wind at our back from the refining space. Here's what under performed in 2010. We under performance on our product portfolio and in the mechanical service business, just not enough private sector work out there. We did more public sector work. And the margins weren't as high, as some margin mechanical contractors came down into the service space. They will leave, because they don't do very well in that work at all. But they've come in and disrupt the market in the short-term year. Secondarily, the refining business as you know as well as I do, it had a terrible 2010 year,

Right. Thank you. Okay. Fair enough.And I guess the third question I had was in regards to EBITDA. As you might know the industrial emissions laws were finalized and published yesterday. The utility oriented rules and emissions standards that will be released over the course of this year. What is strategically your benefit over there given the industrial ones will most likely lead to more inspection and maintenance services. And on the utility side you might see a lot of boil-over.

We have a nice utilities services business especially in the Southeast. We have a nice industrial construction business in California and now in the Southeast. We should benefit from that. And of course heat exchanger's are a big part of what refineries do to reduce emissions through their efficiency. The next energy input if your heat-exchangers are efficient. And I think that's working its way through the system just because of pent-up capital, regardless of the EPA.

Got it. Okay. Thank you.That's all I had.

Thanks T.

And the next question will come from the line of Jeff Beach of Stifel Nicolas.

Yes. Good morning Toni. In the last recovery out of recession, as I remember, there was a pretty good differential in the margins between your private sector work and public sector work. But it seems like in the last couple of years this focus on more specialized business may have closed that gap. Is that accurate? In that there is not the same or into the recovery here, margin benefit from shifting into the private sector work?

Look, I think we definitely have been more selective in the kind of work we do. I think the big drag coming out of the last recession was the K through12 school market. And quite frankly back then we weren't nearly as good at healthcare work as we are today. We are many multiple times better than we were six years ago in healthcare work. So, I think it's a combination of the two. I also think the differential is still there because what it does, Jeff, is allow us to absorb SG&A and it allows us to absorb and get a better velocity on our revenues.

And we get a better velocity on our revenues we can get more absorption in our resources. And that especially comes through with the small projects, because when you have project management and multiple projects, and sometimes just foremen and superintendents can handle those projects for us. And so it's built into the cost of the project. I think those couple things is why we really like to quick term private sector work and what it can do for our margins. So if you say, this is where we are now, and make some of the adjustments in the mechanical margins that we talked about. And this is where we could go, and if you figure all that SG&A doesn't come forward, or at least two thirds of that SG&A doesn't come pouring back into the business, I think we operated a much better level as organic growth comes into the business.

All right. Thanks .

And our last question will come from the lines of Adam Thalhimer of BB&T Capital Markets.

Thanks, good morning guys.

Hello Adam.

On the acquisition front, Toni what's your appetite for doing something larger, something that might be like 10% accretive to revenue?

10% accretive to revenue. Well, I think what you say to yourself is, you do the same analysis you do on the midsize acquisitions as you do on the large acquisitions. Is there something you can do to add value here? Is it a market sector that you like? And in that case when you're doing something that big you better be able to drive synergies. And I -- my CFO's across the table from me, he won't let me buy anything and I don't want to buy anything. I'll let Mark expand on this. Where the operating margins are not accretive to ENCOR. It makes absolutely no sense for us to go into less specialized and less margin enhancing opportunities then we currently have in our portfolio there. Fair statement, Mark?

Yes that's a fair statement. Clearly -- future margin contribution is very critical in the analysis. Obviously, in the past we've been pretty clear that we weren't making acquisitions unless it was immediately accretive. Obviously, the M&A market has changed over a number of years. And so I think our horizon needs to expand a little bit longer term. As far as when we expect to see accretion, but clearly if the margin characteristics of an acquisition target are performing less than (inaudible) business is performing, it's not something that's going to get, initially, a lot of interest from us. Unless or some other special reasons that we think we can drive a lot of synergies and efficiencies under our ownership, that will make it -- make it's market characteristics better performing than what the historical comps would show.

And, Adam, the way we look at the world is the way you would want us to look at our world. We look at cash-on-cash return on investment, we do a couple different cases with or without synergies. We are obviously very comfortable in the world of the private market and midsize acquisitions, the Harry Peppers, the Bahnsons the Scalises, these are things we've done extremely well over a long period of time. We are also very comfortable looking at things that we would call -- for us would be big, but are sort of mid sized. Clearly as we get into the right market and something had around $30 million, $40 million of EBITDA, then we think we can add things to that to really get a growth. Either through the application of capital or some of the skills we have, especially in the area of project management, in the area of procurement, in the area of technician efficiency.

And then we would certainly do that. And we certainly wouldn't go too far afield from what we know how to do. And what we know how to do is, we know how to manage technical labor really, really well. We know how to help customers reduce their cost really well, we know how to manage our customers budget really well. And we know how to work with very demanding and complicated customers on some of their most pressing needs to keep their assets efficient. And, we -- the good news for our investors we -- the management team at EMCOR and the folks running our businesses, are very much look at the investor dollars as our money. And we very much look for a cash return on the investment and we don't ever kid ourselves on what the accretion dilution could be to our earnings per share.

Okay. I appreciate that color. Last question for me is, can you help us understand, you talked a little bit about pre recessionary margin levels and pricing levels. I guess as it relates to pricing, can you help us understand what's the difference between where jobs are priced back in 2007 and where they are priced today.

I think that's a complicated question. Each market sector is different. Where the customers buy are different their competitive sets different. Just generally, right? The construction market even though it's down 30% is huge. And you can argue, we could've made the decision to keep the $6.8 billion of revenue and earn about 1% right now. Because the revenues were there, so you can say what must have happened to you folks at EMCOR is that you saw not only a demand reduction from some of your core customers in some of your core markets, but you saw pricing and contractual terms which can be every bit as dangerous as pricing and that you weren't willing to accept. And so that's one of the reason and all the restructuring you did when times were good , exit the UK realm, do those kinds of tough things. You now went from $6.8 billion to about $5.1 billion Company.

So man, look at those margins they are better than everybody thought we would do in a recession. So, pricing is a complicated issue for us. But we managed pricing against project execution risks, the kind of people we are working with and services side what the customer risk is. Can we expand, the service agreement pricing may not be great up front. But can we then get pulls for two or three times that service agreement pricing, as we help them meet needs on a nice hot day in the middle of the Summer? Those are all the things we think about when we go into pricing. Clearly we saw ourselves in an area of the demand reduction in price reduction. And that's why we are a $5.1 billion Company right now, and not an over $6.5 billion Company

And pricing, recessionary pricing, does it look like it does every prior recession? Is there anything unusual this time around?

It's so specific to jobs. As I described the hospital pricing, there we're working with customers on a sophisticated project that requires us to get in there and understand the budget and work with them on a good solution. The run of a mills commercial project where we have had a long-term relationship with the customer. We are working within their budget. If they decide to put it out to bed -- bid and a $200 million mechanical contractor which we are in a lot of cases will decide to come down and do that small project and hit the pricing hard for three to six months, we typically step away and hold our power. It is market by market, sector by sector, customer by customer, how we think about pricing.

Okay. That's it for me. Thanks a lot.

That's it. Valerie?

Thank you Sir. At this time we will return the call back over to the management team for closing remarks.

Look, I appreciate everyone's interest. This was my first time out of the chute. I know I don't have quite the humor that Frank has, but we had a great run. I hope to have the same great run that he had. Thank you very much and thanks for your interest in the EMCOR.

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