EMCOR Group, Inc. (EME) Q4 2019 Earnings Report, Transcript and Summary

Good morning. My name is Lara, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Fourth Quarter and Full Year 2019 Earnings Call. [Operator Instructions] Ms. Jamie Baird with FTI Consulting, you may begin.

Thank you, Lara, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2019 fourth quarter and full year results, which were reported earlier this morning. I would 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, Jamie. Good morning, everyone. Welcome to our earnings call. And I hope you have arrived at the Internet site, and welcome. We hope you have arrived there, where we have our slide presentation that will accompany our remarks today. Please advance to Slide 2. The presentation and discussion contains forward-looking statements and certain non-GAAP financial information. Page 2 of the slides describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. Slide 3 depicts the executives who are with me to discuss the fourth quarter and full year 2019 results. They are Tony Guzzi, Chairman, President and Chief Executive Officer; Mark Pompa, our Executive Vice President, Chief Financial Officer and Treasurer; and our Senior Vice President and General Counsel, Maxine Mauricio. For call participants 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 Presentation. You can find us at emcorgroup.com. With that said, please let me turn the call over to Tony.

Thanks, Kevin, and I'm going to focus my discussion on the full year results. Mark will pick up some of that, and he'll also speak to the fourth quarter of 2019 in detail. I'm going to be covering upfront here pages 4 through 6. Overall, we had a terrific 2019. We finished the year in good shape, with record financial performance on almost any relevant metric. We set records for revenue at $9.17 billion; operating income at $461 million; net income, $325 million; and earnings per share from continuing operations of $5.75. We had record bookings of $9.1 billion, had overall revenue growth of 12.8% with organic revenue growth in the year of 9.3%. We had cash flow from operations of $356 million, which exceeds our net income. We leave 2019 with flat Remaining Performance Obligations or RPOs from the year-ago period, which is quite good considering the strong organic revenue growth that we had in 2019. Our team executed extremely well and made the most of the opportunities that we had to serve our customers. We also executed well in that we matched our record annual operating income margin of 5.0%. We exit the year with a robust balance sheet and flat Remaining Performance Obligations of $4.036 billion despite that exceptional organic revenue growth. Adding to such strong organic growth in 2019 were acquisitions totaling $300 million of purchase price. I'm now going to focus my discussion on segment performance for the year. Our Mechanical and Electrical Construction segments had another great year, and we continue to execute well in these segments. On a combined basis, we grew revenues to $5.6 billion, with underlying growth of 13%, with organic growth of 9.3%. Operating income margin was a strong 7.0%. We are winning small, midsized and large projects across all geographies and end markets. We had strength in our commercial markets, inclusive of data centers. We are winning work and are successfully managing these jobs with skilled tradespeople in this tight labor market. We are using this strength to build our workforce for the future as our growth provides the opportunity to develop young foremen and project managers. As I've mentioned before, we see our acquisitions as an opportunity to continue to fill in our white space and also build capability in our existing markets. To that end, in 2019, we executed three important acquisitions in these segments, each expands not only our geographic footprint that is Iowa, the Southeast Lower Midwest and an increased presence in Texas, but also enhances our technical and production capabilities. Integration of each of these companies is progressing well. Turning to the Building Services segment. In 2019, we had our best operating income margin performance at 5.4%. We had 12.3% revenue growth that helped to lead to a 22.3% increase in operating income versus the year-ago period. We had excellent growth and performance in our mechanical services business, improved performance in our commercial site-based business, and our government business held its own in an evolving market. We acquired and successfully integrated four companies in 2019, establishing a new geographic presence and excellent technical capabilities with each. We have transitioned several large maintenance contracts well in our commercial site-based business. Our Industrial Services segment had much improved annual performance, and our trajectory has improved post Harvey, which really affected early 2018. We had very strong revenue and operating income growth and are serving our customers well. We also have launched several new service offerings, which quickly gained new customers and increased our customer penetration as they know the EMCOR Industrial Services team can deliver. We also have added a new important cleaning capacity to our Louisiana facility to drive repair and cleaning revenues. Our U.K. segment has continued to perform well, and we are quite proud of our team for how much we have improved and how well the business performs now. We have built a leading franchise in the U.K. that is known for doing complex facility maintenance solutions to some of the most technically sophisticated owners in the U.K. With that, I'll turn it over to Mark, and he'll provide more color on the 2019 financial results. Mark?

Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 7. Over the next several slides, I will provide a detailed discussion of our fourth quarter 2019 results before moving to our full year 2019 performance, some of which Tony outlined during his opening commentary. As a reminder, all financial information discussed during today's call is included in our consolidated financial statements within both our earnings release announcement and Form 10-K filed with the Securities and Exchange Commission earlier today. So let's discuss EMCOR's fourth quarter performance. Consolidated revenues of $2.4 billion in quarter four are up $174.6 million or 7.8% over 2018. Our fourth quarter results include $93.5 million of revenues attributable to businesses acquired, pertaining to a period of time that such businesses were not owned by EMCOR in last year's fourth quarter. Acquisition revenues positively impacted each of our United States Electrical Construction, United States Mechanical Construction and United States Building Services segments. Excluding the impact of businesses acquired, fourth quarter consolidated revenues increased $81.1 million or 3.6% organically. All of EMCOR's reportable segments other than our Industrial Services segment experienced revenue growth during the fourth quarter of 2019. United States Electrical Construction revenues of $564.5 million increased $30.4 million or 5.7% from quarter four 2018. Excluding acquisition revenues of $27.7 million, this segment's quarterly revenues grew organically 0.5% versus the prior year. Revenue gains within the manufacturing, institutional, commercial and health care market sectors were substantially offset by revenue declines within the transportation, hospitality and water market sectors due to the completion or substantial completion of certain large projects during 2018 or early 2019. United States Mechanical Construction revenues of $895.6 million increased $100.9 million or 12.7% from quarter four 2018. Excluding acquisition revenues of $44.4 million, this segment's revenues increased $56.5 million or 7.1% organically. As I have mentioned during each of our quarterly calls during 2019, revenue growth within the U.S. Mechanical Construction segment remains broad-based across most market sectors, with revenue gains from all sectors other than hospitality contributing to the overall increase in quarter four revenues. This segment's revenue performance represents all-time quarterly record for our U.S. Mechanical Construction segment and surpasses the record set in 2019's third quarter. EMCOR's total domestic construction business fourth quarter revenues of $1.46 billion increased $131.3 million or 9.9%, with 4.5% of such growth being generated from organic activities. United States Building Services revenues of $539 million increased $53 million or 10.9%. Excluding acquisition revenues of $21.4 million, this segment's quarterly revenues increased $31.6 million or 6.5% organically. Revenue gains within the mechanical services and commercial site-based services divisions were partially offset by a revenue decline within the government services division due to a smaller contract base, which resulted in lower indefinite duration and definite quantity product opportunities. Additionally, revenues of the segment's energy services division declined quarter-over-quarter due to reduced large project activity in 2019's fourth quarter. Similar to our U.S. Mechanical Construction segment, revenue performance within U.S. Building Services represents an all-time quarterly record for this segment. United States Industrial Services segment revenues of $299.3 million decreased $13.3 million or 4.3% as a result of the cyclicality of our customers' planned maintenance schedules, which led to lower turnaround activity quarter-over-quarter. In addition, within our shop services operation, this segment experienced a decline in shipments of newbuild heat exchangers as well as a decrease in repair volumes, partially driven by the reduction in quarterly turnaround activities I just referenced. United Kingdom Building Services revenues of $105.5 million increased $3.6 million or 3.6% due to incremental revenues from new maintenance contracts as well as an increase in project and repair activities. The impact of foreign currency exchange rates were relatively neutral quarter-over-quarter. My last statement on fourth quarter revenues is that our $2.4 billion of quarterly revenues is both a fourth quarter and all-time quarterly revenue record for EMCOR. Please turn to Slide 8. Selling, general and administrative expenses of $240.9 million represent 10% of fourth quarter revenues and reflect an increase of $20 million from quarter four 2018. The current year's quarter includes approximately $8.6 million incremental SG&A, inclusive of intangible asset amortization from businesses acquired, resulting in an organic quarter-over-quarter increase of approximately $11.4 million. This organic increase is primarily due to higher employment costs, mainly as a result of an increase in headcount to support our organic revenue growth as well as an increase in certain non-income-based state taxes. Reported operating income for the quarter of $122.9 million represents 5.1% of revenues and compares to $113.6 million or 5.1% of revenues in 2018's corresponding period. 2019's 4th quarter operating income represents an all-time quarterly record for EMCOR and represents an 8.1% increase over last year's quarter. I will cover the details of each of our reportable segment's operating income and operating margin performance as I continue through this slide. First, our U.S. Electrical Construction segment had operating income of $41.3 million, which increased by $8.2 million from the comparable 2018 period. Reported quarterly operating margin of 7.3% and represents a 110 basis point improvement over 2018's fourth quarter. Quarter-over-quarter growth in gross profit from commercial, industrial and institutional market sector project activities, inclusive of the telecommunications and power submarket sectors, more than offset gross profit contraction within the hospitality market sector due to the completion of certain gaming projects in 2018. 2019's fourth quarter U.S. Mechanical Construction Services segment operating income of $68.9 million represents a $5.3 million or 8.3% increase from last year's quarter. Operating margin of 7.7% decreased by 30 basis points period-over-period, partially as a result of a change in revenue mix as 2019's fourth quarter included a higher percentage of large projects in the earlier stages of completion, which typically reflect lower projected gross profit margins than projects that are approaching the latter stages of completion. Our total U.S. construction business is reporting a 7.5% operating margin or $110.2 million of operating income, which has increased from 2018's fourth quarter by approximately $13.5 million. Operating income for U.S. Building Services of $24.2 million represents 4.5% of revenues and is an $800,000 reduction from last year's fourth quarter. Operating margin decreased by 60 basis points due to a slight reduction in gross margin as a result of change in the revenue mix, primarily within our energy and government services divisions as well as an increase in selling, general and administrative expenses due to severance expenses incurred associated with certain personnel changes that do not qualify for restructuring treatment. Our U.S. Industrial Services segment operating income of $13.1 million represents 4.4% of revenues and is a $2.2 million reduction from 2018's fourth quarter. Lower quarterly revenue, in addition to an adverse judgment, in connection with the joint venture dispute were the primary reasons for the reduction in both operating income and operating margin quarter-over-quarter. U.K. Building Services operating income of $4 million represents 3.7% of revenues, which is an improvement of $900,000 and 70 basis points of operating margin over 2018's fourth quarter. This segment's quarterly operating performance was favorably impacted by strong project activity in addition to incremental revenues from new customer awards in 2019. We are now on Slide 9. Additional key financial data for the fourth quarter not addressed on our previous slides are as follows. Quarter four gross profit of $364.7 million represents 15.2% of revenues, which has improved from the comparable 2018 quarter by $28.6 million. Quarterly gross profit margin has improved by 10 basis points primarily due to favorable project execution year-over-year within our U.S. Electrical Construction segment, partially offset by a slightly less favorable revenue mix during 2019's fourth quarter within our U.S. Mechanical Construction segment. Restructuring expenses in 2019 of approximately $1 million pertained to the continuing realignment of management resources within our U.S. Building Services and U.S. Electrical Construction operations. Diluted earnings per common share from continuing operations for 2019 fourth quarter is $1.54 as compared to $1.38 per diluted share a year ago. This represents a $0.16 or 11.6% improvement quarter-over-quarter. Our tax rate for quarter four of 2019 is 27.8%, which is lower than the tax rate for the corresponding 2018 period due to certain discrete items in the prior year. We finished 2019 with $178.8 million of operating cash flow in the fourth quarter. This resulted in year-to-date operating cash flow of $355.7 million, which Tony referenced earlier. Such amount exceeded 2018's full year operating cash flow performance by nearly $83 million. We are now on Slide 10. With the fourth quarter commentary complete, and with now Tony's full year 2019 commentary, consolidated revenues of $9.17 billion are up $1.04 billion or 12.8% as compared to $8.13 billion in 2018's annual period. Acquisitions contributed incremental revenues of $290.3 million, pertaining to the period of time that such businesses were not owned by EMCOR in 2018 and positively impacted all of our reportable segments other than our U.S. Industrial and U.K. Building Services segments. Excluding the impact of businesses acquired, year-to-date revenues increased organically $753.7 million or a strong 9.3%. For full year 2019, we achieved revenue growth throughout all of our reportable segments, with all segments other than our U.K. Building Services segment achieving annual growth rates in the double digits. U.S. Electrical Construction revenues of $2.22 billion increased $262.3 million or 13.4%. Acquisitions contributed $134.5 million of incremental revenues, resulting in organic revenue growth of 6.5%. Substantial revenue growth within the commercial, manufacturing and institutional market sectors more than offset revenue declines within the transportation, health care, hospitality and water market sectors. U.S. Mechanical Construction revenues of $3.34 billion increased $377.5 million or 12.7% compared to 2018. Acquisitions contributed $49.1 million of incremental revenues, resulting in an organic revenue increase for our U.S. Mechanical Construction segment in 2019 of 11.1%. Significant revenue growth across most market sectors more than compensated for the revenue decline within the hospitality market sector, which resulted from the completion of certain large projects in 2018. U.S. Building Services revenues of $2.11 billion increased to $231.4 million or 12.3%. Acquisitions contributed $106.7 million of revenues, resulting in a year-over-year organic revenue increase of 6.6%. Strong project and service growth within the segment's mechanical, commercial site-based and energy services divisions more than offset a revenue decline within the government services division due to attrition within their contract base. U.S. Industrial Services annual revenues of $1.09 billion increased $164.4 million or 17.8% compared to the prior year due to increased maintenance and capital project activity within their field services operations as a result of the normalization of demand patterns in 2019 as the first half of 2018, as Tony mentioned, was negatively impacted by the carryover effect of Hurricane Harvey. Our U.K. Building Services segment, 2019 revenues increased 2% to $423.3 million, primarily as a result of new maintenance contract awards within the institutional and commercial market sectors. This segment's year-over-year revenue growth was despite a $19.5 million headwind due to unfavorable foreign currency exchange movement for the pound sterling. Please turn to Slide 11. Selling, general and administrative expenses of $893.5 million represent an increase of $94.3 million as compared to the $799.2 million reported in 2018. This increase includes $35.1 million of incremental SG&A related to businesses acquired, inclusive of intangible asset amortization. As a percentage of revenues, SG&A is 9.7% in 2019 compared to 9.8% for the 2018 annual period. The year-over-year increase in SG&A is due to an increase in employment costs as a result of growth in our indirect labor personnel, which was required to support our organic revenue growth as well as higher expenses associated with company-wide incentive compensation plans due to our overall increase in profitability. Additionally, on a year-over-year basis, we have seen an increase in professional fee expenses due to certain ongoing initiatives and progress. 2019's year-to-date operating income is $460.9 million or 5% of revenues and represents a $57.8 million increase over 2018's annual performance. All reportable segments are reporting higher operating higher operating margins year-over-year other than our U.S. Mechanical Construction Services segment, which, despite an increase in annual operating income, is reporting a decline in operating margin, which I will address as I move through my commentary segment by segment. Starting with our U.S. Electrical Construction segment. 2019 operating income was $161.7 million, which represents an all-time segment record and is an increase of $22.3 million or 16% compared to the prior year. Operating margin for 2019 is 7.3%, which is 20 basis points higher than 2018's 7.1% operating margin. Increased profitability from the commercial market sector, inclusive of certain telecommunication project activity as well as the manufacturing and institutional market sectors, offset the contraction in transportation, health care and hospitality market sector returns due to the completion of several large projects in 2018. U.S. Mechanical Construction operating income of $225 million increased $5.2 million or 2.4% over 2018 levels and represents 6.7% of revenues. Similar to our U.S. Electrical Construction segment, this segment's annual operating income represents record performance. The increase in operating income for 2019 was primarily due to an increase in revenues and associated gross profit within the commercial market sector as well as the institutional and water market sectors. The reduction in operating income margin is due to our current revenue mix, which includes a greater percentage of large projects in the earlier stages of completion. In addition, operating margin for the prior year was favorably impacted by successful project closeouts in 2018's fourth quarter within the manufacturing and hospitality market sectors. U.S. Building Services 2019 operating income of $114.8 million increased $20.9 million or 22.3% due to increased profitability within each of their operating divisions other than government services as a result of revenue growth and improved service contracts and project performance. Operating margin for full year 2019 of 5.4% compares to 5% in the prior year and represents a 40 basis point improvement. As Tony previously mentioned, this segment's performance established new annual records for both operating income and operating margin. U.S. Industrial Services 2019 operating income increased $16.7 million to $44.3 million or 4.1% of revenues. The year-over-year increase is attributable to higher gross profit from the segment's field services operations due to a more normal demand pattern for our turnaround services, including capital project activities throughout 2019. The improvement in field services profitability offset a decrease in operating income from this segment's shop services operations, which resulted from a reduction in newbuild heat exchanger sales year-over-year. U.K. Building Services operating income of $18.3 million or 4.3% of revenues increased $2.4 million due to an increase in gross profit from project and service activities within the commercial market sector, resulting from increased scope with existing customers as well as new contract awards. This segment's operating income was negatively impacted by approximately $900,000 of unfavorable exchange rate movement for full year 2019 related to the valuation of the pound sterling. We are now on Slide 12. Additional key financial data on Slide 12 not addressed during my full year commentary is as follows. Year-to-date gross profit of $1.4 billion is greater than 2018's gross profit by $150.4 million, while gross profit margin of 14.8% is consistent year-over-year. Total restructuring costs of $1.5 million are reduced from 2018's activity. Diluted earnings per common share from continuing operations is $5.75 compared to $4.89 per diluted share a year ago. Adjusting 2018's earnings per share for the noncash intangible asset impairment loss of approximately $900,000, non-GAAP diluted earnings per share from continuing operations would have been $4.91 in 2018. When comparing the current year's diluted earnings per share from continuing operations to 2018's adjusted number, 2019 represents an $0.84 increase or 17.1% year-over-year EPS improvement. We are now on Slide 13. EMCOR's balance sheet continues to maintain its strength, with strong liquidity and modest leverage. Variations of note from December 31, 2018, are as follows. Cash of approximately $359 million is roughly in line with December 31, 2018, as a result of strong operating cash flow, which has offset cash used in investing and financing activities, including approximately $301 million of cash expended for acquisitions, $48.4 million of capital expenditures and approximately $18 million of dividend payments to shareholders. Working capital levels have increased year-over-year primarily driven by growth in accounts receivable and contract assets related to our continued strong revenue growth. Goodwill has increased primarily as a result of the seven businesses acquired during 2019. Net identifiable intangible assets increased as well due to our acquisition activity, partially offset by $48.1 million of amortization expense recognized in 2019. Total debt, excluding operating lease liabilities, is $312.2 million and has increased $16.5 million from December 31, 2018, due to $25 million of net borrowings under our revolving credit line to facilitate our acquisition program, partially offset by our mandatory quarterly principal repayments under our outstanding term loan. As a result of our outstanding borrowings, we have a modest debt-to-capitalization ratio of 13.2% at December 31, 2019. EMCOR had outstanding cash flow performance during 2019, which allowed us to successfully complete a series of acquisitions during the year without increasing our leverage profile. We now begin 2020 with a strong balance sheet and an earnings base that affords us the ability to take advantage of all the opportunities in front of us. With my prepared commentary concluded, I will return the call to Tony. Tony?

Thanks, Mark. End of year, fourth quarter, there's a lot to talk about, and it's always nice to talk about a record year. I'm going to be on page 14, and it's about Remaining Performance Obligations. In short, we continue to see opportunities in the nonresidential market as we move into 2020. Total RPOs at the end of the fourth quarter were $4.04 billion, up $73 million or just about 2% when compared to the December 2018 level of $3.97 billion. Book-to-bill measuring fourth quarter RPO total over third quarter RPO was over 1, which is fairly strong activity when measured against our fourth quarter revenue of over $2.4 billion. We said this a lot, our business is not a quarter-to-quarter business, it never has been, it never will be; and it very much depends on the flow of our projects and our maintenance operations. We have large and small construction projects. We have time and material work that's not part of RPO that drives then RPO activity. We have operations and maintenance services. We have industrial services that lead to projects overlaid on the nine RPO markets we report. One way to look at our success in 2020 is to look at the average RPOs in 2020 what we expect over 2019. Average RPOs in 2019 was $4.11 billion versus an average of $3.80 billion in 2018. And given our various segments generating 12.8% year-over-year revenue growth, it means to me we are executing large and small, faster-burning projects at a very high level, and we continue to see those opportunities ahead. Again, as we have said before, I believe a longer lens is a better gauge for our success. Domestic RPOs have increased roughly 2% or $80 million since December 2018. Our construction segment RPO activity's just a little under breakeven from third quarter of 2018 despite having year-over-year growth of over 9%. In addition to seeing demand for larger, more complex project opportunities, we continue to see robust demand in our Building Services segment as it's up almost $107 million. Most of this growth is supported by HVAC retrofits, building control projects and repair and maintenance improvement projects in our mechanical services business. All of this work centers around customers' desire to improve the efficiency, cost of effectiveness and comfort of their HVAC building and control systems. On the right side of the page, we show RPOs by market sector. As noted, the segmentation of the 2019 bar closely resembles the 2018 sector market participation. Market sectors continue to offer opportunities, and slight up or down year-over-year variances look more like market timing than market softness. With that being said, we did see some good growth in health care projects in 2019. Again, these are very large, complex projects well suited for many of our companies. As we move into the year, our markets remain active, and bidding activity remains strong. In general, we believe with most nonresidential forecast that the market will grow in low single digits, with variances between the AIA classifications of commercial, education, health care and industrial. We are nicely positioned in each of these large market segments. As we go into the end of the year, I'm going to close these remarks on pages 15 and 16. As we start 2020, we continue to believe we are well positioned to deliver strong operating performance. We believe the nonresidential market has enough growth, and it's going to be low, we think, about 1% to 2% to provide us opportunities to perform for our customers on their specialty construction, building service and industrial service needs. We think the turnaround seasons will be normal again this year, and we are in the middle of a pretty good spring turnaround season, and we do expect a decent fall turnaround season. Against this backdrop, we will set initial revenue guidance at $9.5 billion to $9.7 billion. Our initial earnings per diluted share from continuing operations guidance will be $5.60 to $6.30. Our range is based on potential outcomes on the patient timing of work we've already won, coupled with the work we will need to win and execute in 2020. The question is always, how do we move from the low end to the midpoint to the high end of the range? I'd always like to segment the discussion into two buckets: what we can control and what we cannot control. First, I'll discuss the things we can't control. We always talk about uncontrollables. As always, our customers may slow down investments in capital projects due to election year uncertainty here in the United States, or the general economic environment could slow down as we press through year-end, or we have a significant job site condition or operating condition outside the norm for what we can control. While so far the impact has been minimal, and we expect it will continue to be, we're also always subject to external factors whether it be tariffs last year, or this year, the coronavirus. Now, moving onto things that we do control and that's really where we put our focus; and that may impact our ability to meet the midpoint or high end of our guidance range. First, we must maintain cost discipline and look for every opportunity to drive labor productivity. We need to win and bid our share of large project work that will allow us to take advantage of our skill and expertise in almost any end market, from commercial, inclusive of data centers, to health care to transportation to manufacturing. We need to have a decent fall turnaround season, and we have to have the opportunity to execute small project capital work in late Q2 Q3 and Q2, and that is pretty common. Our small project work needs to continue to have strong growth, and we must continue to execute well on our large multisite maintenance contracts. However, I do have a high degree of certainty that we will continue to execute, drive productivity and win our share of project work. With respect to capital allocation, I always prefer to look at this in two- to three-year cycles. And across that time, we've had the opportunity to have had pretty balanced capital allocation between acquisition growth capital and returning cash to shareholders. Across 2018 and 2019, we executed $373 million in acquisitions, and that's their purchase price across our construction and U.S. Building Services segment. And we returned approximately $253 million in cash to our shareholders through dividends and share repurchases. In 2020, our capital allocation priorities remain the same. And to note, we have a decent pipeline of acquisitions, similar to those executed in 2018 and 2019. And we also have the flexibility to return cash to shareholders. Finally, before we begin our Q&A, let me make a brief comment on the systems intrusion we recently experienced. As we previously disclosed on February 15, we determined that we were the target of a RYUK ransomware attack affecting certain of the company's IT systems with malware. As a precautionary measure, we properly shut down certain systems to help contain the problem. We implemented our business continuity plans as designed, and they operated as designed. The focus of our plans is to maintain field productivity and customer service, and we have to fulfill operations near 100% productive. We are measurably bringing our systems back online, which will help to facilitate improving back-office operations. And while our investigation is continuing, we see no direct evidence that either employee or customer data has been taken in the attack. Through counsel, we have retained a leading cybersecurity forensic firm to assist us. We do not have a specific time line for the completion of this investigation, although our objective is to be thorough. The potential financial impact of this attack has been contemplated in the company's full year 2020 guidance. Security is a priority at EMCOR, and we appreciate the patience of our employees, our customers and our vendors as we have worked through this process. I would like to thank everyone on the EMCOR team and also our partners, who have quickly stepped up and answered the call to action. Our team has performed in an extraordinary manner in this attack. We remain effective and efficient in the field, and our back-office operations continued to support the team. Moving forward, we will continue to provide for our customers. We'll remain focused on delivering the excellent service. They have come to expect from us. And with that, I will take your questions. Lara?

Thank you. [Operator Instructions] Your first question comes from the line of Brent Thielman from D.A. Davidson. Your line is now live.

Thanks. Good morning, congratulations. Great year.

Thank you.

Maybe starting on industrial services. You had a really solid spring turnaround in 2019. And I'm just curious if it's too early to call whether you think this year is going to be better, if you can grow off those big 2019 contributions you saw from the segment?

I think you said it right when you started it. It's too early to call. We're in the mid of a midst of a good spring turnaround season. We'll see how it ends up here, and we'll have a pretty good visibility that at the end of the in our first quarter call, that some of that might leak in the second quarter. Mark, what do you see?

Yes. I think, Brent, we're obviously endeavoring to do whatever we can for our customers. And we have a lot of labor mobilized. But as Tony said, it's a little early right now to call. I guess, when we get a preview of February results, we'll know a little bit more, obviously.

Okay. Okay, fair enough. And then Building Services had a lot stronger growth in 2019 than we'd expected, I guess. But should we be thinking of that still as kind of a mid- or high single-digit organic growth business in 2020, so sort of a new norm changed.

I think you're thinking about it the right way, the mid-single digits. Just like some of our construction businesses have small project capability, that can accelerate in a given time period. And of course, we brought on some significant multisite maintenance contracts in 2019. And that will be dependent on what kind of project work comes off of those contracts. So they're not quarter-to-quarter businesses, but if I look at the end of the year, and it was in the mid-single digits, I think we'd be satisfied.

Okay. And then just because it was called out in the presentation, but these large data infrastructure projects, I guess, 2-part question. Is that included in industrial or commercial RPOs? And then given the complexity of these, just kind of curious of the margin profile over the course of the project. Are they accretive? Are they in line to your construction segments?

I think the way to think about them is they would be in commercial for the most part as far as the RPO question. They burn fairly fast for significant projects. I think the margin is very much dependent on contract structure and type of work we're doing, whether we're buying the materials or not, or whether the customer is paying for acceleration. I would say net-net-net, it's really good business for EMCOR because we can deliver it. We have very strong expertise in it, and we deliver great value for our customers when we do that work.

Okay, thank you.

Thank you. We have your next question coming from the line of Adam Thalhimer from Thompson Davis. Your line is live.

Good morning, guys. Tony, I'm almost surprised that you had a good fall turnaround season, and the spring is going well. What's your high-level view of refinery right now?

High-level view, very sophisticated customers, consolidating platforms. EMCOR is pretty well positioned in it, some vendor flux, demanding as hell, and you better be able to execute in March for the right resources at the right time.

So you're gaining share?

I don't know. I think you've got to be real careful, Adam. We've talked about this in the past. I think it's how your customers line up in their turnaround seasons and how you're performing it, whether you've been able to bring additional services into those turnarounds that you have, what's the nature of the turnaround once you've got involved in it. We have some good competitors there. So I'm always hesitant to talk about share. I think in any labor-based service business, whether it be our construction business or our industrial services business, which is more time and material, we think about it more of are we capturing the opportunities we should be in serving our customers? And are we discretely capturing the best opportunities, and that opportunity to prefer I use our labor and the tight labor market? We don't focus a lot on share.

Okay. And then, can you walk us around the country; just kind of what you see in demand, bidding-wise?

Sure. I think, generally, demand is fairly strong. I think in the Northeast, it continues to be sophisticated projects and smaller projects based on energy retrofit and building upgrade. You're up in the Northeast, you're looking at medical projects. You're looking at some power projects. You're looking at multi-site use. You're looking at hospital rebuilds separate from medical production-type facilities. There's not a whole lot of data center business in the Northeast because of the pricing power, right? I mean, I think as you move down and you get to the New York Metro area, we'll carve that out as a market specifically. EMCOR, at least for New York City proper, has never been a high-rise residential business. You go across the river, we do more of that work there. I think some of the big marquee projects are now in the tenant fit-off stage, which fits our skill set very large. There's a lot of large infrastructure work coming, there's some underway, LaGuardia Airport. We're buying a little bit there. As you go to Kennedy, we may or may not play a little larger there. But there's some infrastructure going on. But with the nature of contracting with the MTA, you need to be very careful now of what contracts you take, what contracts you don't take. You go down in the Mid-Atlantic, a very strong market across the board. It's a big data center market. It's a as you expand that definition of Mid-Atlantic, it becomes a bigger health care market, also a strong commercial market. And with what's coming on with potential Amazon headquarters in the D.C. area, it's going to be strong. And that data center market has extended beyond the Metro D.C. area down further into Virginia, and we're well positioned in all those places. As you get down south, again, it's a fairly strong market. There's been a lot of movement in manufacturing plants. That's something our industrial operations the downstream oil and gas, but the ones in our construction businesses, serve pretty well. We're seeing pretty good growth. Of course, that's where we made the BKI acquisition, which we're very excited. They're a market leader down in the southeast who do very sophisticated work across data centers, health care and manufacturing/industrial, and they're terrific people, by the way. As you go down into the Florida market, we're very well positioned for all the work that will happen down with the water authorities in South Florida. The market, overall, Florida is fairly strong, especially for an energy upgrade, energy efficiency, commercial service-type work. You get to Texas, we just talked about the turnaround business and the oil gas business here, it's a consolidating customer base. That presents its challenges, and so you have to be a more sophisticated contractor to serve them. We're in the middle of two decent seasons. Remember, we were fairly weak a couple of years ago, even absent Harvey. You go down in the Metro Houston area, signs of life have returned. Medical work is back. We made an acquisition up in College Station to serve more of the rural markets and to gain entrance into San Antonio. So we're bullish on Texas. We'd like to have more to do there in Dallas. Although our Morley-Moss acquisition from a couple of years ago has exposed us to the Dallas market and maybe given us entrance into what we think is going to be a fairly strong data center market. Right now, we're not a major player like we are in other parts of the country, but we are participating. As you go across there and you look at Arizona, the Southwest, for us, the Arizona market is fairly strong, very sophisticated owners. It has a tech sector, and has a health care sector and a commercial sector, all that are relatively strong. And we participate well there on the mechanical side. As you go to California, California has its own dynamics. We expect pretty good at Southern California, Orange County and down, we expect pretty good performance. The L.A. market's busy from a cross section of, again, high-tech manufacturing, medical, institutional and infrastructure. Northern California has its own issues in the San Francisco area, but the general Bay Area is pretty strong. And you go to the Pacific Northwest, we're big participants in the data center market and also have a pretty strong presence in electrical and general, with a terrific company led by a superstar up there in the Pacific Northwest. You go across the Midwest and come across in the Rocky Mountain region, the Denver market continues strong. There's opportunities there for us. We continue to refocus our companies there and expect them to get better and better. And as you go to the Upper Midwest, one of our we have a terrific subsidiary in the Midwest that does great food process work and is really one of the most capable fire protection contractors in the country. And another one we have in Ohio on the fire protection side that's very good, too. But we're strong in the Midwest, which is probably maybe not a bell for the whole wide west. We just happen to have someone that can travel, do great work. And remember, the food work is one of the few EPC works we do. Ohio continues to be strong, at least for us, in parts of Ohio. And in Pennsylvania, as you move across, there's areas of strength. So I would say net-net, our folks are winning. They're bidding the right projects, and we still see good opportunities in almost all markets nationwide. And some of that might just be our position, right, and the capability that we've built. With 1% to 2% growth, the way we think about it, it's a big market. It has growth. Labor's been fairly tight. We have great labor. We should still be able to execute very well.

Okay, awesome. Thanks. Congrats on the McGregor.

Thank you.

Thank you. We have your next question coming from the line of Noelle Dilts from Stifel. Your line is live.

Well, good morning. I know you talked a bit about growth expectations generally. But I was hoping you could lay out specifically how you're thinking about growth across the four divisions in your 2020 guidance, and also how you're thinking about margins.

Yes, I mean and I'll ask Mark to kick in here. It's really hard for us sitting here in the first quarter to think about it by division. Because the way we think about it, especially in the two construction segments, every decision that comes to our folks is a binary decision. Last year, we won a lot of those binary decisions that we needed to win, that we wanted I shouldn't say needed to win, that we wanted to win is a better way of saying it. And so you never know how that's going to happen or not happen. Last year, we were on the plus side. So we don't think about it that way. We try to think about it, the overall business. And then as we reforecast the year, we get more clarity. And it's now we've been doing it for a long time. We really don't drive our folks by growth. We think about conversion. And we think about using that precious resource we have of labor across each of those divisions and really not get crazy and overrun your capabilities or don't stretch to take a job that maybe doesn't have the characteristics of another one down the road. Mark, maybe you could...

Yes, the only thing I would add to Tony's commentary is, I think, clearly, when you look at the double-digit revenue growth we had across all of our reporting segments other than the U.K. in 2019, I think the logical places where I believe we could do better than the 1% to 2%, or 1% to 3% that Tony had referenced earlier would be both in our industrial and our U.S. Building Services segment. With regards to our construction operations, both electrical and mechanical, clearly, they're the largest in the EMCOR family. And project timing, as Tony just referenced, is somewhat beyond our control. We're optimistic that we're going to see growth in both of those segments. Obviously, where we made acquisitions, we'll see growth, irrespective of that, but on an organic basis. But at this point in the year, it's a little too early to call it definitively because you could certainly see substantial project movement that can certainly impact top line for 2020 but positively impact 2021. So we're just not quite there yet with visibility.

Yes. And that's how we've been doing it for years and it served us well.

Okay. Any thoughts on margins? And I should have given I was ignoring the U.K. I worry about that five platforms, so my apologies. But yes, any kind of...

No, when I go back and go to Adam's question with that on the U.S. The U.K. market for us is okay. We've got really good positions in the U.K., and they've done a great job. So, Adam, the one part, I will talk about share. The U.K. business continues to take share in the market because of stability and excellence in delivery of technical service.

Noelle, with regards to margins, I'll just chime in. When you look at our 2019 full year performance, all of our reporting segments, other than industrial, performed greater than our five-year or 10-year operating income margin performance history. So clearly, that doesn't make us satisfied. We're looking for incremental improvements, but they would be incremental improvements from where we are. And if we could sign a piece of paper today to say that we're performing at equivalent levels to the year we just finished, I not I'll speak for myself, not for my colleagues sitting with me, but I think we would be happy to sign that piece of paper.

Absolutely, Mark. I mean, we're we said this, I think, last year, either in the third quarter call or the call last year, we're much more focused on margin dollars right now, especially in our construction segments, than we are margin percentages. They should go together, but in the nature of contracts to could skew that by 20 or 30 basis points. The other thing that timing can skew it on large infrastructure projects, where we tend to be conservative as we should be as we do really complicated work over a long period of time. So, all and the food processing work has a lot of the same characteristics. So we focus on margin. At this level, at 5%, with great cash flow generation and good growth, I think what Mark's implicit in his conversation is don't turn down an opportunity to grow dollars right now. Worry about whether the margins stay the same or not.

That makes sense. Last question. Could you just comment on what you're seeing in terms of the M&A pipeline opportunities in the market? Have you seen any sort of multiple compression in terms of some of the targets that you're looking at, given that we are later in the cycle?

We really have never especially the deals we've been doing over the last couple of years, we're not competing against the crazies in private equity that are going to redefine the world. We're more focused on executing in businesses that we know. And the reality is we're buying from people that are selling their life's work, and they want to still work. They want to still build their company, and they want a long-term home for their life's work. And I got a great note from a really terrific person we bought a business from, and we're coming up on year four almost. And it's been a terrific, terrific business. And we knew the gentleman for a couple years, and he knew of us. We were the home for his business. He thought we made a fair deal with him. He stayed and ran it for us for four years, and we've had some run it for 10, 15, and nothing was better than when he was able to say in that note to me. He said, "I did everything I told you that I would do. And it's important, or more importantly, you told me you did everything you told me you were going to do." And that business, on every metric, has overperformed where we thought it was going to. That's the kind of deals we're looking for at EMCOR. It doesn't say we don't get ourselves involved in processes. We were just at a small process a couple weeks ago, a relatively small company. We bid, let's say, a multiple that sort of made sense for us, but it wouldn't on the nonaggressive side. And we got good luck, you're two turns off. So we're going to keep grinding it out the way we are making fair deals. We're not known as bargain hunters. That's not who we are. We try to make a fair deal with someone who wants to be with us for the long term, where we can help grow the business together and we can continue to provide great careers for great companies.

Thanks so much.

Thank you. We have your next question coming from the line of Sean Eastman from KeyBanc Capital Markets. Your line is now live.

Morning. I'm just going to ask one since Brian Lane's waiting for us on the other line there.

He can wait.

The Industrial Services business, I'm just curious about how we should be thinking about the mix of work there, just what's looking stronger, maybe relative to 2019 between the field and shop? We did you guys did add kind of a new service line there. Just any kind of comments on business mix and margin progression in Industrial Services?

I think part of the margin progression will come from our ability to get more absorption in the second and third quarter. That's always critical. We have a certain number of people that work with us over an extended period of time. The mix will still skew to the field. That's the a bigger part of the business. But clearly, the incremental dollars we hope to drive through our shops is worth a lot more to us. And they tend to have some correlation with each other. But there's no specific mix we're looking at. But it's probably going to be similar, maybe a little more favorable to the shops, maybe a bigger part in 2019 than it is in 2020 than 2019.

Yes, Sean, the Remaining Performance Obligations in our Industrial Services segment, which is all shop-related, is up over $100 million. And at the end of 2018, it was roughly $87 million. So as long as we're successful in pushing that all through our facilities and successfully get them out the door, I would like to think that we're going to see incremental improvement there. But as Tony said once again, just from skewing the percentages of that segment's revenues, it's going to be hard for that activity to key in at the expense of the field services because it's just so much larger.

Excellent. Got it, very helpful. Learned a lot on this call today. Thanks for the time.

Thank you. And your next question will come from the line of Joe Mondillo from Sidoti & Company. Your line is live.

Hi guys, good morning.

Morning, Joe.

I was wondering if you could talk about the price/cost spread in 2019 given dynamics of wage increases, but also the leverage that you have. Did that change at all compared to past years?

No. You look at our gross margins, they're relatively consistent. The mix is relatively consistent, and I think that's where you see it. One of the things, Joe, we always pay attention to, though, is operating income margins a little more than we do gross margins because our mix of work can skew that 10, 20, 30 basis points of the size we are now. The size we used to be, they used to skew it even more. The size we are now at 10, 20, 30 basis points can skew based on mix. We focus much more on operating. Look, so far, you think about the dynamics of our there are no wage surprises in our business, right? We have three- to five-year contracts with our union. And our nonunion, we also have a pretty good idea what labor visibility is that we're bidding into a project. So then you get down to crew mix. On the union side, we have very strong definition around crew mix because we know what we bid, and we know what we can do for the contract. And if we got exceptions to that crew mix, we know that bidding the job. On the non-union side, again, we have a pretty good idea with the mix of folks we're going to use on a particular thing. So what I'm really saying is, most of our price/cost differential would pass on to the customer. Can you have a short-term dislocation on materials, which is not going on right now? Could you have that? You could, but it prices itself out within eight to 10 weeks.

All right. And relative to past years, just given sort of the economy slowing a bit, I'm just wondering, I mean, your RPOs organically seemed down a little bit. How has your project intake been trending at this point in time in the year relative to past years?

We just finished a series of about 60 calls with our subsidiary organizations. I would say most people look at it takes a little different than that means the one loss, and that can be skewed in short term. We look more at jobs available to bid that we really want to bid. And that is as strong as it was last year. And last year, it was very strong.

Okay. And so in terms of the guidance, which I think sort of it looks like it's calling for maybe low single-digit growth, and you saw a little bit higher growth than that last year, is that just a conservative aspect? Or is there any visibility different than there was a year ago? Could you just frame that relative to the guidance?

We give guidance the same way almost every year for 12 years, right? We start out people saying we're conservative. We try to say, this is what we think we know today. We're sitting here in the first quarter. We've got a whole year in front of us. We have to go book and finish a lot of work in a year in these numbers, and it's a project-based business. And I know people get tired of me saying, there's two things that I've learned over a long period of time. Every decision our customers make is binary in our project business, whether they're going to get the project or not. They usually don't give us pieces of it. It's not like a manufacturer that's got a piece of the market they're going to get. And absence of badness is a big thing in our business. And we start out this year coming off of a really terrific two-year, three-year run on absence of badness. We see no reason that part won't continue. But the binary decisions always make us a little hesitant because someone else is making that decision versus us.

Okay. And then looking at some industry reports, it looks like sort of, overall and this is very broad, so that's why I want to ask the question, that nonresidential construction, the construction starts declined very modestly last year then even in 2018, and they're calling for a little bit bigger declines in 2020. Could you help us understand what you're seeing, if that's similar to what your business and what you're seeing amongst your customers? Or is it a little different? Because that's just such a broad report some of the reports...

Yes, I think what you're saying is right. It's a broad report, lots in there. A lot of residential high-rise would be in there, expansive market, a lot of things that we wouldn't even participate in, for the most part. We tend to skew to the higher end of that market, and we see that really good project opportunities in front of us sitting here today in first quarter 2020.

Okay. And then, last question and sort of two part. BKI, how did that perform in the two months or, I guess, in the fourth quarter if you know what September was or October? I mean, how did that perform in the fourth quarter relative to that $400 million of revenue annually that you've put out in the press release? And then what is your expectation of D&A for 2020?

We don't break out specific subsidiary performance. $400 million is sort of what it's done over a period of time. Like any one of our companies that do large projects, they could have a small eight- to 12-week lull in action, and they pick up pretty quickly. What we do know is it's had it's disclosed in the K, we had pretty good performance coming out of the gates. This is a company that knows how to execute some of the toughest, most sophisticated work they have, and they got they would be they would skew into the top end of EMCOR's contractors immediately. The start is what we think it can do and how we think they'll execute. Mark?

Yes. Joe, the only thing I would add is just to temper Tony's commentary, clearly, with the acquisition occurring in November, we have to get through a lot of acquired backlog amortization. So top line is top line, but incremental profit contribution, at least in the initial months, is going to be somewhat diminished by that amortization expense, which is why when we went out with the press release and provided a commentary with regard to its contribution for 2020, we weren't as we weren't that bullish just because of what the drag is of that acquired backlog. And that's obviously, pursuant to the accounting regulation.

Yes. And just any time you buy a company of that size, right, it comes with that. It comes with large project work that has the same ebbs and flows of our large project work. And when we buy some of that size, we're really looking for contribution to be significant sort of eight to 15 months out from that, just being pragmatic because of the things Mark talked about and also the ebbs and flows of their own business. That's why when we look at something like that, we look at it over multiple years and not just off of one year.

Right, understandable. Could also the DNA just given the size of the acquisition, just wondering what your expectation is for 2020?

Yes. With regards to the amortization expense related to the acquired intangibles for 2020, and this is disclosed in the footnotes of the 10-K, full year intangible amortization is roughly $56.7 million. And then I suspect, from just a pure depreciation expense for the company, it's not going to look significantly different than it did for full year 2019. If anything, it will be slightly up. And if it's slightly up, you're talking single percentage points. And that is a function of us changing our capital for some of these newer businesses, we acquired capital assets.

Okay, thanks. Have a great day.

Thank you.

Thank you. That will be for your last question. Presenters, please continue.

Okay. We thank you, all, for following us in 2019. We look forward to talking to you all in 2020, and thanks for your support and interest in EMCOR. And I'll finish by saying, we are blessed to have a great team here. And I know this team that I have around the table here with us today, we are very thankful for the people in the field and that we operate great for our customers, and we do it in a safe, efficient manner. Have a great day, you all.

Thank you everyone for participating. This concludes today's conference. You may now disconnect. Have a lovely day.