EMCOR Group, Inc. (EME) Earnings Call Transcript & Summary

Good morning. My name is Dave, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2026 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Lucas Sullivan, Director, Financial Planning and Analysis. Mr. Sullivan, you may begin.

Thank you, Dave. Good morning, everyone, and welcome to EMCOR's Second Quarter 2026 Earnings Conference Call. For those of you joining us by webcast, we are at the beginning of our slide presentation that will accompany our remarks today. This presentation will be archived in the Investor Relations section of our website at emcorgroup.com. With me today are Tony Guzzi, our Chairman, President and Chief Executive Officer; Jason Nalbandian, Senior Vice President and EMCOR's Chief Financial Officer; and Maxine Mauricio, Executive Vice President, Chief Administrative Officer and General Counsel. For today's call, Tony will provide comments on our second quarter and discuss our RPOs. Jason will then review the second quarter numbers, then turn it back to Tony to discuss our guidance before we open it up for Q&A. Before we begin, a quick reminder that this presentation and discussion contains certain forward-looking statements and may contain certain non-GAAP financial information. Slide 2 of our presentation describes in detail these 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. And finally, as a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings press release issued this morning and in our Form 10-Q filed with the Securities and Exchange Commission. And with that, let me turn the call over to Tony. Tony?

Yes. Thank you, Lucas, and good morning, and thanks for joining us today. I'm going to start my remarks on Slide 4. EMCOR delivered another outstanding quarter, highlighted by exceptional organic growth, strong conversion of revenue into operating income and cash flow, continued booking strength and record remaining pro forma obligations or RPOs. These results reflect the consistent execution, operational discipline and customer focus that have defined EMCOR success over many years. Importantly, our strong performance during the first half of 2026, combined with the visibility provided by our record RPOs, supports a substantial increase to our full year 2026 earnings guidance. As we will discuss in more detail later in the call, we also continued to execute our balanced capital allocation strategy, returning significant cash to shareholders, while investing in strategic acquisitions that strengthen our capabilities and deepen our position in attractive end markets to better serve our customers. So let's go to the second quarter. In the second quarter, revenues were $5.15 billion, an increase of 19.8% over the prior year. Excluding the impact of acquisitions and the divestiture of EMCOR U.K. Organic revenue growth was 19.6%. Operating income reached $547 million, resulting in an operating margin of 10.6%, while diluted earnings per share increased by 35% year-over-year to $9.06 in the quarter. These results demonstrate the strength of our business model, the quality of our execution and the sustained demand that we continue to see across many of our core markets. Electrical Construction generated revenue growth of 24% year-over-year, while delivering an impressive operating margin of 13.9%. Mechanical Construction achieved revenue growth of 31% year-over-year with a strong operating margin of 12.5% about 12.5%. These results reflect our ability to execute complex projects across multiple geographies and trades and expand our scope with existing customers and consistently delivered value to our customers on mission-critical projects. Growth across our construction businesses continues to be supported by strength in several sectors. In the quarter, the largest revenue increases were generated in network and communications, which is where our data center business is, institutional, manufacturing and industrial and warehousing and distribution within commercial. Our teams are leveraging industry-leading free fabrication capabilities, virtual design and construction technology, which we refer to as VDC many times, disciplined labor management an advanced project laying to execute these projects safely, efficiently and productively for our customers. Our U.S. Building Services segment also delivered solid performance. Revenues increased 5.6% from the second quarter of 2025, while operating income grew 26.6%. Our Mechanical Services division continues to perform exceptionally well, benefiting from an increased service base as well as customer investments in [ ATAC ] retrofits, control systems upgrades, indoor air quality improvements and energy efficiency initiatives. In addition, the restructuring actions we implemented last year in our site-based services business are generating meaningful benefits through a leaner cost structure and a more profitable portfolio of contracts. Our Industrial Services segment generated revenue growth of 26% year-over-year, led by strong performance within field services, while also delivering year-over-year improvement in profitability. Now I'll ask you to turn to Slide 5. One of the most significant indicators of future growth continues to remain our RPO position. At quarter end, total RPOs reached a record $17.14 billion, an increase of 44% from the prior year, 29% from December. And despite the record organic growth in the quarter, 10% sequential growth from March. Notably, 95% of this growth was organic. This record position provides visibility into future revenue and reflects the strength of customer demand across several sectors. Demand within the network and communications sector led by data centers remains exceptionally strong. We continue to see expanding opportunities as customers invest in AI infrastructure and digital transformation initiatives. Equally important, our RP growth was broad-based with strong bookings in water and wastewater health care and the institutional sectors. Customers continue to place trust in EMCOR as we successfully execute projects and we consistently meet our commitments. Many customers are expanding across geographies and scope in the facilities, geographies, trades and other technical disciplines like our preconstruction. This ability to deepen relationships and grow alongside our customers remains a significant competitive advantage for EMCOR. And with that, I'll turn the call over to Jason to go through the numbers.

Thank you, Tony, and good morning, everyone. Over the next 2 slides, I will cover the operating performance for each of our segments as well as some of the key financial data for the second quarter of 2026 as compared to the second quarter of 2025. I'm going to start on Slide 6. Revenues of $5.15 billion established a quarterly record for EMCOR, increasing 19.8% or 19.6% on an organic basis when excluding acquisitions and adjusting for the sale of EMCOR U.K. Each of our segments experienced meaningful revenue growth contributing to our consolidated performance. Revenues of electrical construction were $1.66 billion, increasing 24%. While this segment did experience increased activity across a number of the market sectors we serve, the majority of its growth in the quarter resulted from greater data center projects within the network and communications market sector, where revenues increased by 45%. Mechanical Construction revenues of $2.3 billion grew by just over 31%. Similar to Electrical, this segment experienced the greatest growth from the network and communications market sector, where revenues more than doubled year-over-year. Increased cooling requirements for data centers, coupled with our expansion into new or adjacent geographies continue to drive more opportunities for this segment. In addition to data centers, Mechanical Construction generated notable revenue growth from several other sectors in which we operate. Specifically, institutional revenues increased 77%, commercial increased by 26% due to a resumption in demand for warehousing, distribution and logistics projects, largely within fire protection, and manufacturing and industrial, including food processing, was up 18%. On a combined basis, our Construction segment generated revenues of $3.96 billion, an increase of 28% and establishing new quarterly revenue records for both segments. Moving to Building Services. Revenues of $837.7 million increased by 5.6%. Revenues of our Mechanical Services division increased by $30 million or nearly 5% driven by broad-based strength across each of their service lines. In addition, the segment's commercial site-based services division returned to growth, experiencing a $14 million or roughly 11% increase in revenues due to the award of new facilities maintenance contracts as well as scope or site expansion with existing customers. Like our construction segments, the performance of Building Services represents a quarterly record for revenues. Industrial Services revenues were $353.8 million, reflecting an increase of nearly 26% driven by our field services division, which benefited from greater turnaround activity higher petrochemical project volume and progress made on a large solar project. Let's move to Slide 7 for operating income. We generated operating income of $547.3 million or 10.6% of revenues, both of which are records for EMCOR for our second quarter. Operating income increased nearly 32% and operating margin expanded by 100 basis points. Looking at each of our segments. Operating income of electrical construction increased by 46.8% and to a quarterly record of $231.4 million due to the revenue growth I previously mentioned, coupled with 210 basis points of operating margin expansion. While the segment did benefit from a 20 basis point reduction in SG&A margin, the vast majority of the increase in operating margin was a result of greater gross profit margin given exceptional field execution and a more favorable project mix. Mechanical Construction had operating income of $286.6 million, which represents a 20.1% increase. As with electrical, operating income for this segment represents a quarterly record. Although down 110 basis points, Mechanical Construction earned a solid 12.5% operating margin which is in line with the segment's average margin over both the last 12- and 24-month periods. Similar to the first quarter and very much as we anticipated, the reduction in operating margin of this segment resulted from a shift in mix that included a greater percentage of revenues from projects where we are acting as either the construction manager or prime contractor and which inherently carry lower-than-average gross profit margins due to reduced markups on materials, equipment and subcontractor costs as well as an increase in the number of GMP or cost-plus contracts. Together, our construction segments grew operating income by over 30% and earned a combined operating margin of 13.1%, an increase of 30 basis points. Building Services generated operating income of $63.4 million, an increase of 26.6%. In addition to the impact of greater revenues, the segment achieved 130 basis points of margin expansion, with operating margin reaching an impressive 7.6%. Given a more favorable project mix, coupled with improved execution, gross profit margin increased by 70 basis points. And due to the restructuring actions we completed within our site-based businesses, SG&A margin decreased by 60 basis points. Operating income for Industrial Services was $9.6 million, a significant improvement versus the year ago period, driven by the increased revenues I previously mentioned. If we turn to Page 8, I'll quickly cover a few highlights not included on the previous slides. Gross profit of $1.02 billion increased by 22.6% and our gross profit margin of 19.8% increased by 40 basis points. While all of our operating segments contributed to the greater gross profit dollars the improvement in gross profit margin resulted from the performance of electrical construction and Building Services, as I just highlighted. SG&A was $475 million or 9.2% of revenues compared to $48.6 million or 9.7% of revenues a year ago. While revenues grew nearly 20%, we obtained meaningful operating leverage during the quarter with SG&A increasing by only 13.5%, resulting in a 50 basis point reduction in quarterly SG&A margin. And lastly, on this page, diluted earnings per share was $9.06, which represents an increase of nearly 35% when compared to the $6.72 earned in last year's second quarter. If we briefly look at Slide 9, you can see the strength of our performance for the first half of the year. Revenues have grown by 19.7% or 18.3% organically, our gross profit margin has improved by 30 basis points, and we successfully leveraged our overhead cost structure, reducing SG&A margin by 50 basis points. This resulted in operating income, which has grown by nearly 30%, along with a record operating margin of 9.7%. Let's turn to Slide 10. Our balance sheet, including $924 million of cash on hand and $1.45 billion of working capital continues to provide us with a competitive advantage and enables us to fund organic growth, pursue strategic M&A and return capital to shareholders, all of which you'll see on the next 2 pages. Although not shown on this slide, we did generate $289.4 million of operating cash flow in the quarter, and on a year-to-date basis, our operating cash flow is now relatively comparable to that of the year ago period despite our growth and the associated increase in working capital. With that, I'll turn the call back over to Tony.

Thanks, and I'm going to go to Page 11, and this is a great page by the way. And so before I get into the guidance, Jason and I are going to talk about the acquisitions and capital allocation. I want to briefly highlight on this page some of our business development activity. We continue to execute our acquisition strategy with a focus on transactions that expand our capabilities and strengthen our core competencies. These acquisitions deepen our trade and technical expertise and broaden our geographic reach to better support our customers in our fastest-growing sectors. These acquisitions actually showcase our playbook and mindset with acquisitions. We look to create a cumulative and compounding impact with our acquisitions that provide durable performance. Further, we know that we have both cost and revenue synergies in the acquisition. In these cases, in most of the cases over the last 5, 8 years, our revenue synergies that we create far outweigh the cost synergies over time. If you like each of these acquisitions in turn, B&B Electric provide us really good capability in Wisconsin. They are a good industrial contractor that can do highly complex work. Sidney Electric in Sidney, Ohio complements the capability we have in Ohio that came through our [ Quibi ] acquisition over 5 years ago. We learned with things like Sidney, who are great industrial contractors that can do health care work that we can pivot them if the data center opportunities become available, and then we can grow them pretty significantly. Giles was actually acquired with our Miller team and provides access to the Daytona Beach market and goes -- will allow us to go down through the growing space market in Florida. Schmidt Electric, market leader in Central Texas and Austin it opens up that market to us. They have the ability to do data center market, but that's where we're going to be able to bring some real capability. They can do the most complex work known, and we've learned that they can pivot into data center work to our customer relationships. So keep the base, grow that and put the data centers on top of it. Likewise, Connelly Electric, we have great businesses in Chicago land area. This is purely complementary and the locals they operate. There are 2 great contracting ability. They bring a design build capability we don't necessarily have on some warehousing and logistics work. And we think we can pivot and we know we can pivot them also to the expanding data center market in the Southern and Western Chicago suburbs. We feel really good. I'm going to let Jason go through. And what's important about all this, you look at this page and they're just names on a page, right? Each one of them have a story of a great operator or a great operating family that have owned the businesses for a long time. And now they've trusted us to take that with them. They're still going to be here. With them take these businesses to the next level with how we know to grow our customer relationships, and we're going to learn from them, too. We talked about the design build capability, some of the prefabrication techniques that they have on specific products. So this is a 2-way street, but I know we feel the pressure to continue to build and make these companies successful is now up to 70 years, in some cases, family legacy and ownership legacy have now entrusted us to take it to the next level, and we don't take that lightly. With that, I'll turn it over to Jason.

Yes. As Tony noted, these businesses will all be included in our Electrical Construction segment, and we do anticipate funding the acquisitions through a combination of cash on hand and to the extent necessary, the borrowing capacity provided by our credit facility. The slide shows here that these 5 businesses collectively generated $625 million of revenues and $105 million of EBITDA during the trailing 12 months ended June 30, and when considering the closing dates for Schmidt and Connelly, which collectively represent approximately 75% of the aggregate revenues and EBITDA presented. Our guidance, which Tony will discuss shortly assumes between $250 million and $275 million of revenue contribution from these 5 acquisitions in the back half of the year. Given the anticipated intangible asset amortization, as well as a reduction in net interest income, the impact to diluted earnings per share will be limited for the remainder of the year. But as backlog amortization rolls off over the succeeding 12 to 18 months, these acquisitions will provide further accretion as supported by their margin profile. If you look on Slide 12, we've provided a summary of our capital allocation both year-to-date as well as over the past 10 years. As that slide shows, we remain committed to our philosophy of balanced capital allocation. When you factor in these pending acquisitions, we expect the mix for full year 2026 to be comparable to that of full year 2025 as a percentage deployed towards M&A increases. I'll turn the call back over to Tony for updated guidance.

Thanks, Jason. And I'm going to be on Page 13 to close this out. Given our strong first half performance and the visibility provided by our record RPO position, we're going to raise full year 2026 guidance, which is outlined on Page 12. Our updated guidance reflects continued demand across several key markets, our success in winning and executing large-scale projects and our confidence in the operational capabilities of our teams. As a reminder, while acquisitions strengthen our long-term earnings power, as Jason just said, the earnings contribution near term on a diluted EPS basis remains moderated by acquisition-related backlog amortization. We now expect to earn revenue of between $20 million and $20.5 billion and diluted earnings per share of between $32 and $33.25. Our outlook assumes strong continued operating performance and margins, disciplined project execution and sustained demand across our core market sectors. We remain focused on maintaining pricing discipline, carefully selecting opportunities and delivering those opportunities to provide exceptional value to our customers. I've said these things before, and I always think they are reiterating. We have 4 enduring fundamentals that we built our company on. First, our commitment to training, innovation and safety. We continue to invest in workforce development, prefabrication, virtual design and construction or VDC, project delivery methods that improve productivity and strengthen execution. Second, our disciplined approach to contract management. Our teams consistently balanced customer service with prudent risk management, particularly on large and complex projects. Third, we do have exceptional field leadership. The dedication and expertise of our foremen, superintendents, project managers, project engineers and operating leaders at the subsidiary level and segment level remain an important differentiator for EMCOR and a major reason why customers continue to choose us. And finally, disciplined capital allocation. We continue to [ fish ] in organic growth, execute strategic acquisitions and return capital to shareholders, creating long-term value while maintaining financial flexibility. Together, these strengths create a durable competitive advantage and position us for continued success. I put this line in here this paragraph in there all the time. I don't know when there hasn't been macroeconomic uncertainties that continue to exist, including geopolitical conflicts, commodity cost fluctuations, equipment lead time volatility. However, our teams have always repeatedly demonstrated their ability to manage through complexity and deliver results. We entered the second half of 2026 with strong momentum and confidence in our ability to continue creating value for our customers and our shareholders. And finally, and probably most importantly, I want to thank all my teammates for their commitment to safety, disciplined execution and customer service. Your dedication has continued to drive EMCOR's performance and our long-term success. Thank you for joining us today. And with that, I will turn the questions over to Dave to open the line so that you can ask Jason and I questions innumerable questions about data centers. With that, I'll turn it over to Dave.

[Operator Instructions] Our first question comes from Adam Thalhimer with Thompson Davis.

I'm going to try not to ask about data centers.

Okay. Great.

Good. I actually wanted to ask more in the semiconductor space, which maybe that's the high-tech manufacturing. But can you talk about the -- any bookings in the quarter or upcoming bids in that sector?

We continue to see opportunities there. Fire life safety has been particularly strong in the data center space. Mechanically, we're doing some important work in Arizona, on top of the fire, life safety work. And we're doing that in multiple locations. And we continue to see opportunities. We're very capable in that market. It's always balancing those opportunities versus other opportunities. For us, high-tech manufacturing also includes pharma and biotech and EV battery. Jason?

Yes. I think if you look at where we stand today versus both year-end and sequentially, so from March, we've had strong bookings. RPOs are up in that space, about 7%, both sequentially and from year-end. I think the compares get a little bit easier for us as the year goes on. So as we continue to book some of this work and the first phase -- the completion of the first phase of semiconductors is behind us in prior years. I think you'll see some growth here, either later this year or early next year.

We are fire life safety, I think, on just about every important site that's being built right now. And mechanically, we're on a couple of them and electrically on some of the low voltage work. We continue to do the work also. Like anything else in contracting, you're balancing that opportunity versus other opportunities in that geographic market. And in some places, the data center market might be stronger and provide us more near-term earnings power. We can always go back and do some of that semiconductor work in some of these markets.

Got it. Okay. Super helpful. And then with all the acquisitions, a lot of other contractors entering your end markets via acquisition. I thought maybe it would be helpful for you to just break down how your capacity, the machine that you guys have built over decades compares to some of the competitors out there?

Yes. I think for the most part, Page 11 -- Page 13, 11?

11.

11 is a great example of our machine in action and that machine will continue. First thing we look for is can they execute in the field. So we're not doing anything different today than we were doing 5 years ago or 8 years ago. Doing a little more a little larger, but can they execute in the field? If they can't execute in the field, whether they're a $5 million acquisition or a $400 million acquisition, we're not touching it. Then the second part is, do they share our values? The smaller ones, that's hard to -- a $10 billion acquisition, maybe that's less important because we're going to hold that into one of our existing operations. But if we're going to do a significant acquisition, like some of the ones on Page 11, they got to look at the world the way we do. We're a value-driven company. We have a disciplined operating model. And they have to be willing to share learning and put learning and be willing to accept learning and best practices. And so that hasn't changed. When you look at others in the space, I don't know how they do acquisition or whatever. But to buy into this space, cold and not know how it operates and think you're going to generate synergy. Here's some things I do know over a long period of time. Other than the relationships like that does help bundling mechanical and electrical together at a local site, we are plenty of sites where we're together. We don't very rarely combine a bid. That's not a thing, putting all the trades together typically. The other thing I know I'm pretty sure about is no one's asking the contractor that's doing the utility work and now do the data center work because you're doing the utility work, and I'm pretty sure the site contractors are not the electrical contractor of choice because they did the site work. These trades are very distinct with strong expertise, and I would say that's going to remain that way for a long time. So we're looking for people that are very good at what they do. And in some of them, we think we have substantial growth because what we've learned over time, some -- especially the sort of midsized $50 million to $100 million contractor. If they can do complex work, if they've been working in industrial plants, if they've been working at health care facilities. And let's say there's a data center adjacency with the relationship we have. We're pretty sure we can put them in the data center market in addition to that. And our folks have been great about share of knowledge. And that knowledge starts all the way back or how you're going to estimate it, how you're going to bid it, what are the contractual negotiations look like? All the way through to how do you set up the VDC models, how does that work all the way through to means and methods in the field. What we've learned through time we learn a lot from our acquisitions on means and methods and we learned a lot from them on basic project planning labor, and they learn a lot from us. Overdrawn, but just thought I'd give some highlights.

I also think quickly, if you look at that package of acquisitions we put together, the thing that sets this apart is they're fairly diverse, both in terms of geography when you look at them together and markets they can serve. So I think that diversity gives them the opportunity to grow similar to the way EMCOR has grown over the last several years.

The next question comes from Brent Thielman with Oppenheimer.

I guess first question, the mechanical margin comparisons, obviously reflects some mix effects, which always seems to be the case, Tony, but Jason, I think you mentioned performance as a prime, a higher proportion of cost plus contracts as some of the factors in the quarter. Is there any sort of change in philosophy here with that business or just something more nuanced in the quarter?

We talked about this in Q1 as well, Brent. And it's very much some of the water and wastewater work that we're doing, some of the food processing work that we're doing. So we had more bookings in that space. We have more revenue coming through some of those contracts. And so it's just a little bit dilutive to margin. It really is more of mix and project based than anything else.

Yes. I mean, 12.5% outstanding performance and we're executing really great across a number of end markets and a number of projects.

Yes. And I think that -- those dynamics remain throughout the rest of the year, but I don't think it's an indication of the philosophical change in terms of all -- we're [ running ] the business as we the way we always have.

Okay. And then you mentioned with a few of these transactions maybe some plans to pivot some or more of their business towards kind of the data center opportunities that might be within their kind of respective territories. Obviously, you bring the customer relationships to the table. But could you just talk about the capabilities of these operations to do that work? Is it going to require more resources for you to do that effectively, I guess, kind of what gets you comfortable with those businesses potentially pivoting toward that kind of business?

Because we've done it internally. Multiple times, we've taken existing EMCOR companies that have the same profile of these companies. And we've done it with acquisitions already in Ohio that's the best example. But existing EMCOR companies that have the exact capability, the exact kind of mentality these folks have, and we've been able to pivot them pretty successfully into both high-tech manufacturing into data centers. But these are good businesses in their own right, serving the markets that they serve, like Jason said, that's what makes us exciting. Where there's an opportunity to add growth because of the things you identified, and we're pretty sure we can do that. Now what we do is do we implant a couple of our folks at the fill level to help them initially, sure. Do we help them on the front end to make sure the numbers are right or do we help them with contract negotiations? All those things are true. But ultimately, they got to have great field execution, great field supervision to be able to pivot and grow their business with us in those markets.

And the next question comes from Justin Hauke with Baird.

I've got 2 here. I guess, first one, just clarifying I'm assuming it's probably the case, but the acquisitions, are these all still union contractors like your typical electrical construction markets or the mix?

Yes, they're all unions. [ IBW ] contractors.

Okay. I figured they were. And then I guess the other question I had was just I wanted to understand the dynamics on raising the margin guidance. Obviously, electric is really strong here. And I know you guys don't manage the margin, you manage gross profits and risk and everything else. But with the mechanical drag and then the incremental amortization from these deals, I guess I'm just surprised that the guidance was raised, given and you've been relatively conservative on that. So just can you walk through what's different that drove that?

I think one of the biggest factors is you can see the acceleration we've had in revenue. And that revenue acceleration is really absorbing a lot of overhead, both some of our indirect within cost of sales and then just SG&A. And so with that revenue growth, we're getting better absorption, we're getting better SG&A leverage. And so with the new revenue guidance, and we said all along, this is really going to be a revenue story for us if there was upside with that new revenue guidance, we feel better about the operating margins because we're going to continue to see that absorption. And then to your point, we had really, really good execution from Electrical and then we saw greater contribution from Building and Industrial. And so when you kind of look at the first half of this year, we see no reason why the back half shouldn't look like the first half.

And the next question comes from Avi Jaroslawicz with UBS.

So yes, the really strong electrical margins here in Q2. Just wondering if there was anything kind of more unique that drove that strength? Or was it really more just everything going right?

Well, I don't know if everything went right, but -- what it is, is just the ebb and flow of the business. A good point in the business. We always talk about margins in bands, and we're in a pretty good place. We're at the midpoint of what that band would be right now. And we always say margins will fluctuate quarter-to-quarter. But in our guidance is pretty strong performance for Electrical for the remainder of the year.

Okay. Yes, I was wondering if -- I know last quarter, we spoke about how there was contract mix that was kind of restraining some of the margin percentages and so --

More mechanical. That's more mechanical.