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 Third 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.

Thanks, Dave. Good morning, everyone, and welcome to EMCOR's Third 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 third quarter 2026 and discuss our RPOs. Jason will then review the third quarter numbers and 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.

Yes. Thanks, Lucas, and good morning, and thank you for joining us. I'm going to begin here on Slide 4. EMCOR delivered another quarter of exceptional growth, margin performance, operating cash flow and capital allocation. Revenue increased 28.8%, or 25.5% organically. This growth, coupled with strong field execution, and improved SG&A leverage resulted in meaningful expansion of our operating margin. Operating cash flow in the quarter was $797 million, and remaining performance obligations reached a record $18.57 billion, up 47% year-over-year, 40% from year-end 2025 and 8.3% sequentially despite the strong revenue growth we had in the quarter. Most of the RPO growth was organic reinforcing the depth of demand across multiple end markets. On an adjusted basis, our third quarter operating margin was 10.5%. The reflecting the strength of our execution and operating model. And we earned $9.60 in adjusted diluted earnings per share, a 46% increase versus the year ago period. Our construction segments continue to deliver outstanding performance. Both our Electrical and Mechanical segments grew revenues by more than 40%. With approximately 75% of such growth being generated organically. Our Electrical Construction segment delivered a 13.3% operating margin. And Mechanical Construction delivered a 12.1% operating margin resulting in combined margin expansion, up 40 basis points. Demand remains broad-based with particular strength in the network and communications, which is data centers for the most part, health care, manufacturing and industrial, water and wastewater and institutional sectors. We continue to outgrow the broader nonresidential construction markets. Building Services also posted a strong quarter. Revenue grew nearly 5%, operating income increased 11.5% and operating margin expanded 50 basis points driven by a favorable revenue mix and improved SG&A leverage. Industrial Services performed as expected and relatively in line with the third quarter of 2025. Importantly, we saw expanding opportunities in LNG maintenance and petrochemical work, which supports our continued broadening of the markets that we will serve with this segment. As I previously mentioned, and this will be on Slide 5 now. As I previously mentioned, our RPO position strengthened considerably during the quarter, reaching a record $18.57 billion. This growth reflects strong demand across the majority of our market sectors led by network and communications or data centers as well as continued strength in health care, water and wastewater, institutional, manufacturing and industrial and I'm going to take a deeper look at each of these sectors. Data center RPOs totaled a record $8.74 billion, more than double the year ago level and an increase of 13% sequentially. This growth demonstrates our broad capabilities in this sector, which includes electrical, mechanical and fire life safety construction and service. Healthcare RPOs totaled $1.71 billion, an increase of 31% year-over-year, reflecting the strength of this long-standing core market for EMCOR. Water and wastewater RPOs totaled $1.42 billion, an increase of 38% year-over-year as we continue to capitalize on opportunities throughout Florida. Institutional RPOs totaled $1.72 billion, an increase of 25% year-over-year driven by strong demand for many of our education customers, especially at the higher level education. And finally, Manufacturing and Industrial ARPUs totaled $1.18 billion, an increase of 10% year-over-year and nearly 27% sequentially as we are benefiting from a broad range of investments across this sector. The size, quality and diversity of our RPOs remains very strong. Before I turn the call over to Jason, I want to underscore what these results demonstrate. Our field leaders continue to exhibit discipline and precision as they execute some of the industry's largest and most technically complex projects for our highly sophisticated and very demanding customers. At execution it is translating into strong margins, cash generation, record RPOs and growth well above the underlying market. With that, I'll turn it over to Jason.

Thank you, Tony, and good morning, everyone. Starting on Slide 6, I will cover the results for each of our segments as well as some of the key financial data for the third quarter of 2026 as compared to the third quarter of 2025. Revenues of $5.54 billion established a new quarterly record for EMCOR increasing 28.8% or 25.5% on an organic basis. Revenues of Electrical Construction were $1.85 billion, increasing 44.3%. While the largest increase was driven by greater demand for data center construction projects within the network and communications market sector, where revenues increased by 68%. This segment also saw notable growth within institutional, which was up 78%; health care, which was up 31% and manufacturing and industrial, which increased by 28%. Additionally, contributing to the growth of our Electrical segment was $140.1 million of incremental revenues resulting from the acquisitions we previously announced, including Connelly and Schmidt, which closed in early August. Mechanical Construction revenues were $2.55 billion, an increase of 43.1%. Greater demand for data center construction projects, including expanded scope associated with increased cooling requirements, led to significant growth within the network and communications market sector, where revenues increased by nearly 130%. Beyond data centers, mechanical construction benefited from greater opportunities within several other sectors including institutional, which was up 56%; commercial, which increased by 23%, really driven by warehousing, distribution and logistics projects, Manufacturing and industrial, which includes food processing and was up 17%; Healthcare, which grew by 29% and Water and Wastewater, which increased by 32%. Driven by the Danforth acquisition in Q4 of last year, this segment generated $173.2 million of incremental revenues within the quarter. On a combined basis, our construction segments had revenues of $4.4 billion, establishing new quarterly revenue records for both segments. We often discussed the diversity of demand that we have across our business and with double-digit revenue increases across a number of sectors, I think the performance of our construction segments this quarter really highlights that fact. If we move to Building Services, revenues of $852.4 million increased by 4.7% and like our construction segments represents a quarterly record. We continue to see strength within Mechanical Services, which experienced growth across each of its service lines including service, repair and maintenance, building automation and controls and retrofit projects. In addition, given greater project volume, the award of new facilities maintenance contracts and scope or site expansion with existing customers, this segment site-based business grew revenues by 6.5% continuing the trend we saw last quarter. Industrial Services revenues were $287.5 million, generally in line with the prior year. However, on a year-to-date basis, revenues of this segment are up 10.4% as a result of greater refinery turnaround activity, higher petrochemical project volume, new opportunities for LNG plant maintenance, and progress made on a large solar projects. Let's turn to Slide 7 for operating income. On a GAAP basis, we generated operating income of $545.8 million, or 9.8% of revenues. Our third quarter results included a $34 million noncash intangible asset impairment charge associated with the prior acquisition within our Building Services segment. This business, which accounts for less than 1% of the segment's revenues, provides energy efficiency contracting outside of traditional mechanical services and our site-based offerings and has been affected by disruption in the performance contracting market. When excluding this impairment, our operating income was $579.8 million, and our operating margin was 10.5%. This represents a 43% increase in operating income and reflects 110 basis points of operating margin expansion. Looking at each of our segments. Operating income of electrical construction increased by just over 70% to $247 million due to the revenue growth I previously mentioned, coupled with 200 basis points of operating margin expansion. While the segment did benefit from a 50 basis point reduction in SG&A margin, the overwhelming majority of the increase in operating margin was a result of greater gross profit margin, given an improved execution and a more favorable project mix. Mechanical Construction had operating income of $308.2 million, which represents a 34.4% increase. Similar to the first half of the year and as we anticipated, the 80 basis point reduction in operating margin of this segment resulted from a change 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 a lower-than-average gross profit margin due to reduced markups on materials, equipment and subcontractor costs as well as an increase in the number of GMP and cost-plus contracts. Despite the year-over-year decrease, operating margin of 12.1% and continues to reflect strong execution by our operating companies across a vast number of projects, and we remain pleased with this performance. Together, our construction segments grew operating income by nearly 50% establishing new quarterly operating income records for each segment and earning a combined operating margin of 12.6%, an increase of 40 basis points. Operating income of Building Services was $66.2 million, an increase of 11.5%, and operating margin was a quarterly record of 7.8%, a 50 basis point improvement over Q3 2025. A more favorable mix, coupled with better project execution, resulted in a 30 basis point improvement in gross margin and due in part to the restructuring we completed within our site-based business last year, SG&A margin decreased by 20 basis points. Operating income for Industrial Services was $5.1 million, compared to $6.3 million a year ago. A 120 basis point improvement in gross profit margin was more than offset by an increase in SG&A of the segment. If we move to Slide 8, I'll cover a few additional items regarding the quarter. As you can see on this page, the increase in our operating margin reflects both outstanding execution by our field teams, as well as meaningful operating leverage resulting from the growth we've experienced. Specifically, gross profit of $1.11 billion increased 32.7% while gross profit margin expanded by 60 basis points to 20%. And SG&A was $528.4 million, or 9.5% of revenues compared to $429.6 million, or 10% of revenues in last year's quarter. Moving down our P&L. Diluted earnings per share was $9.04 but when you adjust for the intangible asset impairment charge, diluted earnings per share was $9.60, which represents an increase of 46.1% compared to the $6.57 earned in last year's third quarter. If we briefly turn to Slide 9, you can see our performance year-to-date. Revenues have grown by 22.9% or 20.8% organically. Our gross profit margin has increased by 30 basis points, and we successfully leveraged our cost structure, reducing SG&A margin by 40 basis points. In a few slides, Tony will provide our updated guidance for 2026. Underlying that guidance is strong fourth quarter performance and the expectation that our full year adjusted operating margin will at least be equivalent to the unprecedented 10% that we have earned through the first 9 months of the year. I'm going to close on Slide 10, which is our balance sheet. With $775 million of cash on hand and $1.03 billion of working capital, we continue to have significant financial flexibility. This allows us to invest in organic growth execute on strategic M&A opportunities and return capital to our shareholders. Although not shown on the slide, we generated $796.7 million of operating cash flow in the quarter. And on a year-to-date basis, operating cash flow is now $1.1 billion. We remain committed to our philosophy of balanced and disciplined capital allocation, which is demonstrated by our year-to-date activity as well as this morning's announcement that our Board of Directors has authorized an additional $500 million for the repurchase of our common stock. Through September 30, we have invested nearly $800 million in acquisitions and returned $510 million to our shareholders through both share repurchases and dividends. These actions reflect our confidence in the long-term prospects of our business. And with that, I'll turn the call back over to Tony

Thanks, Jason. I'm going to finish on Slide 11 and 12 and going to the capital allocation point before I jump in. You can see all that on Slide 12. Given our year-to-date performance and the visibility of our record RPOs, we are again raising our full year 2026 guidance. We now expect earned revenue of between $20.6 billion and $21 billion and adjusted diluted earnings per share of between $34.50 and $35.50. This increase reflects the same demand across multiple sectors. Our continued success in winning and executing large-scale projects and our confidence in our operating teams. Although our acquisitions enhance long-term earnings, near-term earnings per share and operating income contribution is moderated by acquisition-related backlog amortization. Our integrations remain on track, and we are pleased with the strategic fit, build capabilities and the teams we have added. Our outlook assumes continued strong execution and demand across our core end markets. We will remain disciplined on pricing, contract terms, project selection and resource allocation. Now our performance rests on 4 durable operating fundamentals that support growth, margins and cash generation, and they really do serve as our long-term foundation for our compounding success. First, we invest in training and innovation, workforce development, prefabrication, virtual design and construction or we refer to it as VDC, and enhanced project delivery methods to increase productivity, expand capacity which ultimately strengthens our execution. We are supporting these capabilities with investments in our recruitment, development, software enhancements, leadership rating and new and expanded facilities. Second, we exercised disciplined contract and risk management. Our teams always balance customer service with rigorous project selection and execution, particularly on large and complex opportunities. Third, we believe our field leadership is a structural competitive advantage. The expertise of our Forman, general Forman and super attendance, project managers and operating leaders drive safe, reliable execution and that supports repeat business with our customers. And finally, our balanced capital allocation strategy has supported long-term value creation. We are investing in organic growth, pursuing strategic acquisitions and returning cash to shareholders while preserving the financial flexibility to act on attractive opportunities. During the quarter, we did close on our acquisition of Smith Electric headquartered in Austin, Texas, and Connely Electric serving the Chicago land area. We are very excited that they are part of our team. We do recognize the macro environment remains uncertain, including geopolitical conflict supply chain disruptions and policy and regulatory changes. Our approach is consistent, serve our customers well, protect our contractual rights, manage overall risk and execute through changing and challenging conditions. And we have done that very well over a very long period of time. And I'm going to close, like I always do, by thanking my EMCOR teammates. Their commitment to our culture of mission first people always is the foundation of that success. With that, I will take questions and turn the call over to Dave to queue you.

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

Great quarter. I wanted to start on the RPOs for Network & Communications. You said $8.74 billion based upon what you're seeing, the trends you're seeing, what are the expectations for growth there?

I mean we're going to keep growing. And you'll always remind you, and I know, Adam, you know this, and this is no particular comment. Growth can come in lumpy, but we see great opportunities across the country in all the markets we serve in the data center market. We're seeing it electrically, mechanically and through fire life safety. We've seen no abatement of that demand despite all the noise out in the market right now, preelection. And we continue to work for the right people. The people that have long-term prospects, the big hyperscalers and those that are serving the bigger hyperscaler is who we work for. We're not very much into the Neo cloud market and sort of the speculative building in data centers. So good market, will continue to be good. We are working off a larger number. So I think eventually, you run in the large law of large numbers. But I said that last year, too, and we doubled our growth.

Yes. And I think the acquisitions we made give us additional opportunities in additional geographies where maybe they weren't as exposed at the time of acquisition, and that gives us the play into the future. .

Okay. And just as we think about the margin performance in the quarter and how we should think about that going forward as a comp? Were there any headwinds from gasoline prices or diesel prices or other inflation in Q2?

At one time that -- with the size we were 5, 8 years ago, it would have mattered a lot more. I think the headwind from that is de minimis because we also are very good at going out and adjusting our bill rates, mainly in mechanical service, which is where the majority of the gasoline is used. So was it a headwind I would say marginally adjacent.

Yes. I think on an annual basis, round numbers, we use 20 million gallons of gasoline and diesel. So the way I think about it is every dollar increase is a $20 million impact to us. If we don't pass those costs along. But to Tony's point, we're doing a good job passing along. So I would say at least 50% of the increase is getting passed on to cost.

Yes. I mean the ones that don't are them being captured really and project pricing through the project managers and the form it back into the jobs or in some general condition on a job. So pretty good, like Jason said, 50% to 75% getting on. You never get it all back. But the flip side, you don't reduce your prices immediately. So it catches on the other side when prices come down for a little bit. .

And's then, Jason, just any quick thoughts on cash from ops in Q4. You've still got a lot of -- you still have a lot of accounts receivable that could flip in Q4?

I think for us, nothing's changed in terms of the way we view long-term cash generation, right? So somewhere between net income to 80% to 85% of operating income on a full year basis. So for this year, that puts you somewhere around $1.5 billion to $1.7 billion of operating cash flow for the full year.

The next question comes from Brent Thielman with Oppenheimer. .

Tony, this massive growth in data center, RPO, is it fair to say it's all happening still within your kind of your core markets? Is any of this kind of a product if you moving, maybe what we call it a little further from the home markets into traditional areas?

I think 75% of it is still in our core markets. But we are expanding. We are expanding in Texas, even free Smith acquisition mechanically. We've expanded in Texas. We are serving mechanically some of the more rural markets in Texas that's part of this. But in general, it's our core markets growing and building out and/or within 30 to 40 miles of our core markets.

Okay. And then look, as this gets towards data centers get toward it looks like 50% of your combined construction segment revenue here pretty quickly. I guess I want to get your view whether there's a balance in terms of mix of markets and customers you want to maintain? Or is it simply move the teams to go after the best returning opportunities for the business right now?

I think it's both, Brent, the reality, right? We have built in diversity of demand because not all our end markets, not our geographic markets have data center capability. We still have a fairly significant business in California. And really the data center business in California is de minimis. We have a fairly significant business across all New York State, New England, the data center business across New York State, none there right now because of the more but the data center business in New England, New York State and even New Jersey is de minimis. So we have built in diversity. But even within markets where we have strong data center demand, we are very cognizant that we still need to serve, especially our core health care customers and some of our institutional customers and our manufacturing customers. So we are very cognizant of having the ability to spread across all. And quite fortunately, we've been able to do very creative things with our workforce to make that happen to include things like the word on those sites, 4 or 5 days a week and if they want to pick up over time, they can come over on a scope of work and work on the data center side on the weekend to pick up extra hours. But it's -- there is no magic number to any of this. I think it starts with -- we have long-term customers. We have built in diversity. We have long-term customers and markets that have data center demand. We're going to continue to serve but then on balance, we're going to make the right mix management opportunity because we are contractors over the next 1- to 3-year period about how we'll serve the market and how we'll maximize return for our shareholders.

And if you're asking about the data center, in particular, if we have a concentration risk there, I would say we're not tied to 1 or 2 customers. It's fairly diverse. And if you look year-to-date data centers are about 1/3 of our revenues, and that 1/3 of our revenues is split amongst numerous customs.

Yes. But even there, Brent, in the data center market, Jason makes a good point. One, we have diversity, not only of trade and geographies and end customers, but the other thing that we have also is we have more people who want to work with us. I do want to say people are just like we could do what we want. We have more data center construction that want to work with us, then we can serve. So we do have the ability to be selective about who will work for, what kind of work we'll do. It's always important when you think about data centers. Still, the majority of our mix still tilt stores, cloud storage, data centers and cloud computing data centers. And I think it's going to be that way for at least the next year, 1.5 years.

Okay. Excellent. Maybe just last one. Tony, a lot of your peers talk about developing physical capacity in MEP, whether you call it prefab or whether you call it modular. You've been doing a lot of that for a long time. Maybe you could just talk about what your plans are within your business on that side? Are you doing expansions? Are you building that out? Maybe just to clarify what it is you do there as well?

Yes, 100% were expanding. The way we think about it is what demand do we have to support that, typically, we're building for ourselves. We are -- we do have the opportunity with a couple of the hyperscalers to build modules. And the difference between us and one of our peers, we're not building buildings and then putting them on tractor trailers and moving them out. We're building piping modules, piping racks, hack units, things like that. We typically have done it for ourselves. We have done it for them to have other people install. I think that's going to become more of what we do. There won't ever be a significant amount of our revenue but we will service that market. I think pragmatically, once we are doing that on a job, they will then ask us to expand and do the installation. So that will actually grow geographic areas, too. . But no -- we're expanding some of our traditional locations. But we'll add over the next 2 quarters, a couple of fab shops that will be fab-only serving multiple EMCOR companies and of the external market. And then the other thing to always think about with us, one of the reasons people sell their companies to us is a lot of times they have good fab capability. Others don't have great fab capability. And as a result of that, we help them with best practice learning and build the right fab shop for them to grow in the future.

The next question comes from Justin Hauke with Baird.

Great. So yes, I wanted to -- I feel like this has been a question on kind of across the space. But on the cash flow, the net contract liabilities balance went up a pretty decent amount, I guess, on some of the advanced billings on some of these earlier stage projects. But I guess, Jason, maybe you could just talk about the sustainability of that given that you've had such rapid growth, and that's obviously a very favorable working capital dynamic. But to the extent that growth, I don't know, moderates or maybe just doesn't grow at the same pace, how that would potentially reverse itself?

Sure. Sure. So I mean, you're right. Some of the growth that we saw this quarter in contract liabilities is just both hand-in-hand with the growth we've seen in backlog or RPO. And that's typical. The flip side, though, is we still do have a significant investment in working capital in the form of unbilled and accounts receivable. And so if growth were to slow, you are going to see that start to liquidate and you're going to see that turn into cash flow. And to some extent, that's part of what drove this quarter's cash flow in industrial, right? We had fairly strong growth last quarter in Industrial. We were up nearly 30%. This quarter, revenues were relatively flat. You saw the flip of that favorably impacting cash flow. So in a period where growth slows for us, we've historically spent off a lot of cash, and I think that would happen again.

And it's always import to know billings in advance doesn't mean we're getting all cash in advance.

Some of that is offset by the increase in ARR. Some of it is just advanced billings that haven't been collected yet. Some of it is deposits. So it's a combination of both.

All right. No, that makes sense. And then I guess maybe my second one here would just -- obviously, margins were really good this quarter and the outlook is higher. On the mechanical side, you talked about the mix impacts. You think you guys have been talking about that for a while. But just curious if you could quantify how much maybe that's weighing on the margins. And also, to what extent does that continue? When do we get to a point I mean, I guess it can change all the time. But assuming the mix stays at the same level, when does that kind of anniversary .

I think the level we're running at today is where we're going to be running for probably the next 12 months or so, right? So there's been there's been a year-over-year decline in mechanical margin because of the mix shift. I think as we enter '27, that decline goes away. I think the margins are around this level. Again, if you look at a rolling 12- to 24-month average for mechanical, that puts you in the 12% to 12.5% margin range. I think that's where we're going to be for some time.

Yes, because I think the more AI data centers become part of the mechanical mix. The designs on those are so much more dynamic. And also that's sort of the contracting method of choice from one of the big customers we work with. And that's not going to change. We're not going to seek to change it because it is so dynamic. These are still really good gross margin job. They're really good jobs. And they contribute pretty significant margin dollars, which is really. You've heard me say this before, the margins we're operating in now. We're much more in the quest for margin dollars than margin percentages.

The next question comes from Brian Brophy with Stifel.

Great quarter. Just following up your answer to Brent's question, it sounds like you're leaning more into fab only capacity here relative to what you've talked about in the past. So I guess I'm just curious as to what changed. Is this a reflection of the demand environment, something else? And how you're thinking about managing risk given the incremental fixed costs.

The incremental -- so for us, think about fixed cost, we lease the facilities. We have the capital in it. And these are long-term, I would say, geographically advantaged locations we're going to. So if there is a fixed cost turnabout, we will get out of less productive facilities long term and go to these. Secondarily, nothing's really changed in how we think about it. It's just -- we have 1 or 2 customers who like what we've done on the work that we do and see the fabrication that we do. And in places where we don't have installation capability that like us to support them on how they are going to build out longer term. Like I said, we're not going to be looking to build buildings and put them on trailers with a bunch of other people's equipment and ship them to the job site, that's not what we do. What we do is take the capability we have whether it be on some of the substation packages we do or even things like that and also some of the work we do on piping packages and then serve the market more broadly, which allows us to absorb the fixed cost in the facilities we have. So not a shift on what we do, responding to our customers and being supportive of them.

And I think even if we made some larger investments in that space, CapEx for us is still going to be 1% or less of revenue, still in terms of investment, not significantly...

That is really tied to the revenue growth.

Understood. That's really helpful. And then you touched on some of the SG&A leverage you're seeing curious how much runway is left there? And part of the reason I'm curious is that it's been less of a margin driver for you guys in the past despite some of the really healthy top line growth we've seen over the past, call 5 years. I guess I'm just curious if something has structurally changed there and how you're managing costs on that line.

Not really. We are getting some efficiencies, right? With favorable mix, large projects and because we're shifting more to large project mix, we do absorb more SG&A doing that. Also, nothing structural. -- it'd be probably small into this. But the positive of GMP contracts is you can absorb more through general conditions of your SG&A overhead into those contracts, then you may get right on a fixed price contract. Nothing very much structurally. I just think it's the mix of large project work, coupled with us because as large projects, you don't have to hire 5 project managers, you can have 2 virtually you're doing the smaller work, you still need more people to do that. .