EMCOR Group Inc

NYSE:EME

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. My name is Jerome, 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 2021 Earnings Call. [Operator Instructions] Mr. Brad Newman with FTI Consulting, you may begin.

[Brad Newman]

Thank you, Jerome, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2021 fourth quarter and full year results, which were reported 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.

[R. Matz, executive]

Thank you, Brad, and good morning, everyone. As always, thank you for your interest in EMCOR, and welcome to our earnings conference call for the fourth quarter and full year of 2021.

For those of you who are accessing the call via the Internet and our website, welcome to you as well. And we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today.

We are on Slide 2. This presentation and discussion contains forward-looking statements and may contain certain non-GAAP financial information. Page 2 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 shows the executives who are with me to discuss the quarter and full year 2021 results. They are Tony Guzzi, our Chairman, President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; and Executive 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. Tony?

[Anthony Guzzi, executive]

Yes. Good morning. Thanks, Kevin, and thank you for joining us to discuss our 2021 fourth quarter and full year results. I'm going to be covering Pages 4 to 6 in my opening comments. We will also provide our guidance for 2022. I'm going to focus my initial commentary on full year 2021.

My only comments for the fourth quarter of 2021 are that it went as expected. However, the impact of COVID on productivity was more pronounced than we could have contemplated in October. We performed well, but we fought through increased workplace and supply chain disruptions because of the surge in COVID cases due to the Omicron variant.

Before I discuss our results, I want to thank the entire EMCOR team for their efforts in serving our customers so well during these challenging and ever-changing times. I also want to thank our leadership team down through the subsidiary level for focusing on employee safety and wellbeing, operational excellence and rigorous contingency planning.

In 2021, we had our best safety year ever, with performance that will continue to place us in the top 1% of our industry. We will continue to strive every day for 0 accidents. EMCOR had an exceptional year in 2021. We earned revenues of $9.9 billion, which represents 12.6% growth over 2020 revenues. We had operating income of $530 million and operating income margin of 5.4%. We generated operating cash flow of $319 million.

Overall, it was another year where the strength of our team, our diversity of end market and demand and our execution capabilities enabled us to overcome many external challenges. COVID was omnipresent, but we worked to keep our teams safe and productive. Supply chain challenges manifested themselves in many ways from uncertain prices, extended lead times and missed deliveries from our suppliers, but we persevered. Why? Because we are resilient.

We have also built long-term relationships with our customers and our suppliers. We negotiate hard, but we are fair and respectful, especially in times like these. We are able to leverage such long-term relationships to foster open and transparent communications, which in turn allows us to better plan our work.

I'm now going to discuss a few key drivers and results from each of our operating segments. Our Mechanical and Electrical Construction segments had outstanding years with combined operating income margins of 8.2%, which is very strong in light of the headwinds presented by supply chain constraints and COVID-induced labor productivity issues. We had 10.5% organic growth across these segments on a combined basis.

Our Electrical Construction segment performance was driven by strength in the commercial market to include data centers and the resumption of demand in key markets in 2021, which were not operational for part of 2020, the institutional market and also the health care markets.

Our Mechanical Construction segment also benefits -- or benefited from those things to include data centers and health care end markets, but additionally showed strength in the water and wastewater markets and the manufacturing markets. Increased demand from customers within the biotech, life sciences and pharmaceutical industries as well as the continued build-out of our customers' e-commerce supply chains further aided the performance of our Mechanical Construction segment.

Our investments in prefabrication and BIM, or Building Information Modeling, continue to pay significant dividends for us. Our customers can depend on us for excellent execution on complex, fast-paced projects that require the ability to provide design-assist capability, rigorous labor planning and the ability to deliver in an uncertain supply chain environment. As shown in our remaining performance obligations, or RPOs, both segments have strong momentum going into 2022.

Our U.S. Building Services segment had another strong year with a 4.8% operating income margin and 10.9% organic growth. Despite such growth, our RPOs are at record levels due to strong project demand, driven by replacement work tied to energy efficiency and indoor air quality upgrades.

Our mechanical services business performed well, but faced headwinds from supply chain-induced productivity issues on small project work. Increased fuel costs additionally hindered this division's operating income margin. Our commercial site-based business had an exceptional year, driven by large contract execution as well as several successful contract startups. We leave the year in a very strong position to perform in 2022.

Our Industrial Services segment performed as we expected. We saw strengthening demand through the year. We are positioned well with some of our most important customers, and we kept our best people on our team during the past 2 years of market turbulence. We built important capabilities to not only service historical demand in the refining and petrochemical end markets, but also service the renewable energy and renewable fuels market. In a tough market that requires steadfast decision-making, we're strong, can become stronger, and we did.

Our U.K. business had another terrific year with excellent contract and specialized project execution, resulting in organic revenue growth of over 18% and an operating income margin of 5.5%. This team has used our organic investment capital well. We leave the year with $5.6 billion in remaining performance obligations, a $1.0 billion increase over the previous year. We have a stellar balance sheet with the ability to support our strong organic growth and investments in acquisitions. And we have a team that wins in the most arduous and challenging circumstances.

And with that, Mark, I will turn it over to you to go through the financial results.

[Mark Pompa, executive]

Right. Thanks a lot, 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 results as well as a summary update of our full year performance, some of which Tony just outlined during his opening commentary.

As a reminder, all financial information discussed during this morning'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 $2.64 billion are up $358.7 million or 15.7% from the fourth quarter of 2020. Excluding $63.1 million of incremental revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by EMCOR in last year's quarter, revenues for the fourth quarter of 2021 increased approximately $296 million or 13% when compared to the fourth quarter of 2020.

We experienced strong revenue growth from all of our reportable segments during the quarter with specific segment performance as follows. United States Electrical Construction segment revenues of $541.9 million increased $80.1 million or 17.3% from quarter 4, 2020. Excluding incremental acquisition revenues of $48.5 million, this segment's revenues grew organically 6.8% quarter-over-quarter. Increased project activity within the commercial and health care market sectors were the primary drivers of the period-over-period improvement.

United States Mechanical Construction revenues of $1.06 billion increased $91.2 million or 9.4% from quarter 4, 2020. Revenue growth during the quarter was derived from the majority of the market sectors we serve, with manufacturing and health care project activity representing the most significant period-over-period increases.

With respect to the manufacturing market sector and as commented during our third quarter's earnings conference call, we're actively engaged in the construction of certain large food processing plants, which will continue to accelerate as we move through 2022.

From a health care perspective, we continue to see strong demand for our services as our customers retrofit or replace their mechanical systems to increase flexibility in their facilities or improve the quality of their work environments. In addition to the increased revenue experienced within these market sectors, this segment additionally benefited from incremental revenue within the water and wastewater market sector, driven by several large construction projects currently underway.

Revenue gains of this segment were partially offset by quarterly revenue decline within the institutional market sector due to the completion of several projects in 2020's fourth quarter. Both our Electrical Construction and Mechanical Construction segments established new all-time quarterly revenue record levels with their fourth quarter performance.

EMCOR's total domestic Construction fourth quarter revenues of $1.6 billion increased $171.3 million or 12%, with 8.6% of such revenue growth being organic. This combined Construction revenue performance represents the third consecutive quarter where we have eclipsed the previous all-time quarterly revenue record established by this group.

Even with this record revenue performance, each of our Construction segments have increased the remaining performance obligations year-over-year, which Tony just commented on and will discuss further when he goes through our RPO development a little later on our call this morning.

United States Building Services segment revenues of $630.1 million increased $59.2 million or 10.4%. Excluding incremental acquisition revenues of $14.6 million, this segment's revenues increased 7.8% organically. Revenue gains were reported within most of their operating divisions, with their mobile mechanical and commercial site-based services divisions reporting the largest increases.

Greater project and service activities with a focus on building controls and energy efficiency were the primary drivers for the quarterly revenue growth within the mobile mechanical services group, while the growth in commercial site-based services was due to new customer additions as well as the expansion of certain services for existing customers.

EMCOR's Industrial Services segment revenues of $283.6 million increased $119.3 million or 72.6% due to improved demand for both field and shop services as we continue to experience some resumption of maintenance and capital spending in the energy sector, which we started to see during the third quarter of 2021.

United Kingdom Building Services segment revenues of $123.9 million increased $8.9 million or 7.7% from last year's fourth quarter. Revenue gains resulted from the continuation of strong project demand from this segment's customers, who previously deferred such work during 2020 as a result of the COVID-19 pandemic and the prolonged lockdowns mandated by the U.K. government.

Please turn to Slide 8. Selling, general and administrative expenses of $260 million represent 9.8% of fourth quarter revenues and compare to $244.6 million or 10.7% of revenues in the year-ago period. 2021 fourth quarter includes approximately $7.1 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter increase in SG&A of $8.3 million.

Consistent with my commentary during both our second and third quarter earnings calls, 2020 benefited from substantial cost reductions resulting from our actions taken in response to the COVID-19 pandemic. A significant percentage of such savings pertains to employment costs, including furloughs, headcount reductions and temporary salary reductions.

Conversely and not to be redundant with my prior quarter's commentary, EMCOR's considerable revenue growth in 2021 has necessitated an increase in headcount. Our SG&A for 2021's fourth quarter additionally reflects an increase in health care costs as a result of a normalization in the level of medical claims as well as the impact of COVID-19-related testing, illnesses and treatments.

We have also seen an increase in travel and entertainment expenses due to the continued resumption of normal business activities and have incurred incremental expenses to support various information technology and cybersecurity initiatives. The reduction in SG&A as a percentage of revenues is a result of the aforementioned increase in quarterly revenues without a commensurate increase in certain of our overhead costs as we were able to successfully leverage our cost structure during this period of strong organic growth.

Reported operating income for the quarter of $143 million or 5.4% of revenues compares to operating income of $137.6 million or 6% of revenues in 2020's fourth quarter. The 60 basis point reduction in operating margin is due to a reduction in gross profit margin within each of our domestic reportable segments due to a less favorable revenue mix quarter-over-quarter, which I will expand on during my individual segment commentary. Despite this reduction in quarter-over-quarter operating margin, EMCOR's $143 million of operating income represents a new all-time quarterly record.

Specific quarterly performance by segment is as follows. Our U.S. Electrical Construction segment operating income of $41.3 million decreased $2.6 million from the comparable 2020 period. Reported operating margin of 7.6% represents a reduction from the 9.5% reported in 2020's fourth quarter. The decrease in both operating income and operating margin is due to declines in gross profit and gross profit margin within the commercial and transportation market sectors, given a change in composition of project work performed quarter-over-quarter.

In addition, this segment experienced an increase in quarterly SG&A expenses, the majority of which was a result of incremental expenses resulting from acquisitions, including amortization of identifiable intangible assets.

Fourth quarter operating income of our United States Mechanical Construction Services segment of $92.6 million represents a $7.8 million decrease from last year's quarter. And operating margin of 8.7% represents 170 basis point reduction from the strong 10.4% earned in 2020's fourth quarter.

Whereas the results for the prior year's quarter benefited from the favorable closeout of several major projects within the commercial and manufacturing market sectors, the results of Q4 2021 included increased revenues from certain large projects within the manufacturing and water and wastewater market sectors for which we are acting as either the general contractor or the construction manager and therefore carry lower-than-average gross profit margins than are typical for this segment.

As I stated last quarter, while we saw some operating margin compression on a comparative basis, at a combined 8.4% operating margin for the fourth quarter of 2021, our U.S. Construction operations still generated margins greater than both the 3-year and 5-year averages.

Operating income for U.S. Building Services is $27.8 million, which is consistent with the fourth quarter of 2020, while operating margin of 4.4% represents a 50 basis point reduction quarter-over-quarter. This segment's mobile mechanical services division continues to work through a larger number of fixed-price capital projects, which traditionally have a lower gross profit margin profile when compared to the segment's callout service and small project work.

Additionally, while we continue to attempt to mitigate the effects of supply chain disruptions by leveraging our relationships with our suppliers and customers and through enhanced labor planning and project scheduling, this segment experienced some productivity impacts resulting from longer material and equipment lead times during the quarter.

Our U.S. Industrial Services segment operating income of approximately $4 million represents a $12.6 million improvement from the $8.6 million loss reported in 2020's fourth quarter. Although an improvement, this segment continues to be performing below historical levels of profitability due to the remaining headwinds in the oil and gas industry, which has suppressed maintenance and capital spending and has resulted in continued pricing pressure. However, as stated in my revenue commentary, we have seen some positive movement in each of the last 2 quarters and are cautiously optimistic for 2022 and beyond.

U.K. Building Services operating income of approximately $5 million or 4% of revenues represents an increase of $740,000 and a 30 basis point improvement in operating margin quarter-over-quarter. This improvement is due to an increase in project activity primarily within the commercial market sector.

We are now on Slide 9. Additional financial items of significance for the quarter not addressed on the previous slides are as follows. Quarter 4 gross profit of $403 million is higher than the comparable prior year quarter by $19.2 million or 5%. However, gross margin of 15.3% is lower than the 16.8% in last year's fourth quarter primarily as a result of the shifts in revenue mix in each of our U.S. Electrical and Mechanical Construction segments as well as our U.S. Building Services segment as I just referenced during my segment operating income discussion.

We had no restructuring expenses for the fourth quarter of 2021 compared to $1.6 million recorded in 2020's fourth quarter. Diluted earnings per common share of $1.89 represents a new quarterly record for the company and compares to $1.45 per diluted share in last year's fourth quarter.

Adjusting 2020's EPS for the negative impact on the prior year's income tax rate resulting from the nondeductible portion of 2020's impairment charges, non-GAAP diluted earnings per share for the quarter ended December 31, 2020, was $1.86. When compared to the current quarter, we are reporting a $0.03 or 1.6% quarter-over-quarter earnings per share improving, 1.6%.

Please turn to Slide 10. With the fourth quarter commentary complete, I will now augment Tony's introductory remarks on EMCOR's annual performance. Consolidated revenues of $9.9 billion represent an increase of $1.11 billion or 12.6% when compared to 2020. Our year-to-date results include $196.3 million of incremental revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in the 2020 annual period.

Acquisitions positively impacted both our United States Electrical Construction and United States Building Services segments. Excluding the impact of businesses acquired, year-to-date revenues increased a strong 10.3% organically, with all of our reportable segments reporting total and organic revenue growth year-over-year.

Operating income of $530.8 million represents a substantial increase from both our GAAP and adjusted non-GAAP operating income figures for full year 2020. Year-to-date diluted earnings per share is $7.06 and represents a new full year record as well as an increase of 10.3% over 2020's adjusted non-GAAP diluted EPS of $6.40.

Although not shown on this slide, our operating cash flow for 2021 is approximately $319 million. On a comparative basis, 2021's performance is significantly less than the prior year as the contraction in our 2020 revenues due to the COVID-19 pandemic resulted in declines in accounts receivable and contract assets, which positively affected 2020's operating cash flow.

Additionally, as highlighted during the course of 2020, the prior year's operating cash flow was aided by certain government stimulus measures, which resulted in the deferral of approximately $117.5 million of nonincome-based tax payments from 2020 into both 2021 and 2022. With significant organic revenue growth in each of our reportable segments during the 2021 fourth quarter, we experienced an increase in working capital investment, which is typical for a business that is in growth mode.

Please turn to Slide 11. EMCOR's balance sheet remains strong and liquid. Cash on hand has decreased by $81.5 million from year-end 2020 or $319 million of operating cash flow was offset by cash used for financing activities of $245.5 million, inclusive of $195.5 million of cash used for the repurchase of our common stock and cash used for investing activities of approximately $153 million, most notably due to payments for 8 acquisitions, net of cash acquired, totaling just over $118 million.

Despite the decrease in cash on hand, working capital has increased by nearly $72 million, resulting from organic revenue growth during the period. Increases in accounts receivable and contract assets were partially offset by increases in contract liabilities, accounts payable and accrued expenses. The increase in goodwill is predominantly a result of the businesses we acquired during the 2021 period.

Net identifiable intangible assets have increased by $6.5 million during 2021 as the additional intangible assets recognized in connection with the previously referenced acquisitions was largely offset by $64 million of amortization expense during the year.

Total debt, exclusive of operating lease liabilities, has decreased by $14.8 million, primarily as a result of the $13.9 million required principal payment made on our term loan in December 2021. EMCOR's debt-to-capitalization ratio has reduced to 10.4% from 11.9% at year-end 2020.

Our balance sheet, in conjunction with the borrowing capacity available to us under our credit agreement, will continue to enable us to invest in our business, return capital to shareholders and execute against our strategic objectives as we move into 2022 and periods beyond.

With my portion of this morning's slide presentation completed, I will now return the call back to Tony. Tony?

[Anthony Guzzi, executive]

Thank you, Mark, and take a well-deserved drink of water. I'm going to be on Page 12, remaining performance obligations by segment and market sector.

The fourth quarter was another strong bookings quarter for the company. In fact, we experienced project awards strength throughout the year with the RPOs growing sequentially in each quarter of 2021. As mentioned earlier, total company RPOs at the end of the fourth quarter were $5.6 billion, up $1 billion or a 22% increase over the 2020 year-end total of $4.6 billion.

Organic RPO growth was a strong 18%. This strong booking activity across the company translated to a book-to-bill ratio well over 1 despite the company generating record revenues for the quarter and for the year. Combined, our 2 domestic Construction segments experienced strong construction project growth in the year, with RPOs increasing by $800 million or 21.5%.

The Mechanical Construction segment saw RPOs increase by $647 million or 24%, while the Electrical Construction segment saw an increase of $156 million or a healthy 15%. U.S. Building Services saw RPO levels increase $220 million or almost 36% from the year-end 2020.

As I mentioned earlier, we continue to experience widespread demand for replacement and repair projects across a wide spectrum of energy efficiency and indoor air quality products. They're being blended together now. As the virus continues to hopefully move further behind us, it looks like more and more companies are planning for their employees to return to their offices, at least based on the bookings we're seeing. So I see this demand for small project retrofits continuing through the year.

Over on the right side of the page, we show RPOs broken down by market sector. We saw RPO growth in each of these sectors listed, except to the transportation area. We saw some project completions during the year. RPO growth was widespread and balanced in 2021 across most market sectors we participate in, with commercial RPOs, which for us includes data centers, increasing 29% year-over-year. Our commercial project RPO total now stands at $2.4 billion and makes up 43% of total RPOs.

With regard to data centers, we have leading construction positions in 3 critical trades, the installation of complex electrical mechanical systems, certainly. But in addition, we have large-scale nationwide fire protection project capability. Over the last few years, we have strengthened our take capability through organic investment and tuck-in acquisitions. And that's resulted in strong growth for this part of our operation.

And look, we have the ability to execute the most complex and demanding fire protection construction and service opportunities from a semiconductor plant, a distribution center, an office building, a hospital, basically because the nature of the union, which is a road local that travels for the most part nationwide, we can do any job anywhere.

Finishing our market sector RPO growth, health care RPOs were up 21%; institutionals, up 24%; industrial manufacturing, which includes the pharma, semiconductor and food processing projects we mentioned, are up 42%. Water and wastewater is up 22%, and short duration projects are up 20%. Again, many of these short duration projects are performed by our Building Services company and also a portion of our Electrical and Mechanical Construction segment companies.

From an RPO perspective, I like where we are. I like our position as we enter 2022. As I said already, I believe we have gotten more resilient and stronger in the last few years. I believe our field execution is unmatched from a customer confidence perspective, whether that be a general contractor, EPC, construction manager or facility owner or tenant.

Whether it be a construction project or a service call, EMCOR companies have a demonstrated record and performance history of on-time and on-budget project and service execution, both of which have been evident over the last couple of years that have been very challenging from an execution standpoint.

I'm now going to go to Page 13, and we're going to talk a little bit, like we have in the past, about the growth and resilient market sectors that we talked about. We've covered this page before, but I thought I would cover it in light of all the macro factors impacting our business today.

These sectors continue to drive our strong organic growth and buoyed our business through these challenging times. Macro trends are driving these in many ways, and there's demand for EMCOR. And they're good -- and they -- sometimes they're good trends -- macro trends and, sometimes from a global perspective, they're not good trends, but they're good trends as far as EMCOR's business is concerned.

These trends include digitization and cybersecurity, e-commerce, supply chain repositioning and redundancy really spurred on by geopolitical events and cost and supply uncertainty, enhanced life safety requirements, health care flexibility and expansion made real again by COVID. Energy transition and energy cost volatility also are potential disruptors that allow EMCOR to service customers.

I'm going to cover each of them in turn now. If you go to data centers, what's driving that? One is just the insatiable demand to supply large hyperscale data centers to support all kind of digitization efforts, whether it be e-commerce, AI or just protecting yourself from a cyber basis as more and more people move things into the cloud supported by big companies like Google, Amazon, Microsoft that really -- and the large companies are building their own data centers that lead to centralization. We have that capability in many parts of the country and really into the growth markets. And we support it with the electrical, mechanical and fire protection trades.

Warehousing. On the construction side, as far as electrical/mechanical, we weren't doing much, but we've always done a lot on the fire protection side. We're the best in the business when it comes to e-commerce and large-scale warehousing on a fire protection basis, bar none. We're helping continue to build out both the cold e-commerce chain and the standard e-commerce chains in the fire protection.

We're also moving more into the electrical business with these warehousing because some of the larger warehouses, especially with the Amazons of the world, are also putting charging stations in, which when you build at scale for delivery trucks is a fairly complex electrical project that require substation and enhanced switchgear.

Industrial manufacturing, this has been one of the biggest shifts in our business. As one of our folks said this morning, if you go back 10 or 15 years, a lot of our electrical/mechanical work was developer-based business, doing commercial office buildings. That is no -- we still know how to do that, but that is no longer the case. We are big time into electrical and industrial and manufacturing.

We're supporting the semiconductor build-out in most of the critical markets mechanically and, in some places, electrically. We're supporting -- and fire protection. We're supporting the pharma rebuild here in the U.S. We're supporting the battery plants in the U.S. We're supporting the electrification as we move through this energy transition. So industrial manufacturing have become a big deal. And in industrial, we continue to support our existing process industry customers in a large way in refining, petrochemical, paper, cement, tires, pick one.

Health care. I think we proved our mettle over many years in health care. And I think our customers appreciated even more what we can do through COVID. We were able to help people on the fly make their facilities more flexible. And we did it with precision, and we did it with low-cost solutions.

And then really what's happening in health care right now is you're seeing more and more demand for flexible systems. And you're seeing really capacity expansion. I think a lot of towns and cities realize they've taken too much health care capacity out.

And water and wastewater, we're in the best market in the country, and that would be Florida, not only for Everglades restoration, but also just supporting the growth of the population, especially in South Florida. And we've got one of the best in the business down there with Pat Carr and his team in Poole & Kent.

Mechanical services is ubiquitous. Our mechanical services operations are supporting energy efficiency, indoor air quality upgrades. Our team was ready when COVID hit. Our team has been ready for years and has been executing for years on energy efficiency upgrade. Almost any retrofit project we do has an element of energy savings and is really helping buildings become more efficient, greener and more productive for the owners.

And now you add in indoor air quality, as like I said -- you've heard me say before, we spent 15 years, 20 years taking outside air out of buildings. In the last 2 years, we've been figuring out how to put inside -- outside air back into the buildings, but also continue to battle the energy efficiency as we do that. And nobody is better in the business, and no one has the footprint we have to do it.

And then add on to that, some of the renewable projects we do, especially in -- out West to add small-scale solar, to add on-site solar and on-site generation of other fuel sources, we have a complete offering.

Indoor air quality, I talked about. And again, fire protection is ubiquitous. We are the best in the business in fire protection. And we've got some of the best operators in the industry that really set the tone for the industry. And I'm thankful every day that they're part of our team.

On Page 14, I'm going to switch there and talk about EMCOR capital allocation trends. There is no trend is what I would offer. We look at this in 5- and 6-year snapshots. And to me, and I think to Mark, the most important bar is the bar all the way over on the right, which just show what we've done on a 6-year average. And that plus or minus 5% is what we would look at for right now is, in a lot of ways, optimal capital allocation for our kind of business in these kind of markets.

So what are we trying to accomplish in our capital allocation? Look, we love to fund organic growth. And we've really grown like crazy in our Construction businesses and our mechanical services business. Think about it. We've had organic growth despite shrinking in our Industrial Services segment over the last couple of years. And that is really a testament to our ability to serve those projects I talked about on the previous page.

We love to fund internal capital expenditures. In our mind, we do that for 2 reasons. We do it for productivity, or we do it to facilitate growth. An example of that might be a fire protection fabrication shop strategically positioned in growth markets that allow us to get a cost advantage and even serve our customers better.

And acquisitions are a priority for us. And we talked long through the years about what kind we do. We've been very successful over the last 5 years. And what I'm saying is more of the core, continuing to execute, adding great capability and great people and great companies.

But we also believe in returning cash to our shareholders through share repurchases and dividends. In an ideal world, we're investing 55% to 70% of our capital into the business for growth and productivity. And growth can come both organic or through acquisition, and the balance returned to shareholders. That formula has proven to be a winning formula for EMCOR.

And now I'm going to close, and that will be on Page 15 and 16. As we develop our initial guidance, a lot of times, we're faced with, especially in the last couple of years, a lot of uncertainty in the external environment. I don't know about you. I was certainly hoping that 2022 would have a lot less uncertainty.

And clearly, when you're faced with a lot of uncertainty, it behooves all of us to take a good hard look at what the lower and upper ends of a guidance range could be. And it behooves all of us to think conservatively about how the business can execute with all those uncertainties out there.

So our initial guidance will be $10.4 billion to $10.7 billion in revenues and $7.15 to $7.85 in earnings per diluted share. We do expect the nonresidential market to grow in the low to mid-single digits. We do expect more normalized demand from our refining and petrochemical customers. And we expect to continue to see all the things we talked about, small projects on the previous page.

We also have captured in our guidance, I think, some continued disruption from macro factors like inflation, supply chain and COVID. And as within prior years, where we end up in the range will depend on several factors. Some of them are in our control, and some of them are outside of our control.

I'd like to talk about first the things that are within our control. We have a track record, I think, over a very long time of doing a really good job controlling costs as best we can. But supply chain issues and COVID will continue to be wildcards.

COVID testing cost could be a wildcard as we are self-insured outside of our union plans. And the President's executive order on home testing is quite broad with little or no qualification as far as people procuring supply. I do expect continuing headwinds from fuel costs as the -- and the Ukrainian crisis showed that today. And I think we captured most of those headwinds in our guidance.

I think we will continue to work -- win work, and we'll continue to be disciplined in our estimating and pricing. I like where our backlog is, and I like where our backlog is priced today. We will continue to emphasize the areas where we have differentiated expertise. And we talked about those on the previous page. We will continue to lead the way on safety at all levels of the organization.

However, there are more than a few things that are outside of our control. And I'm going to ask a question and then answer for you how we see it. Will the supply chain get better or worse? Personally, I expect little to no improvement in the supply chain as the year progresses. Some areas will improve, and others will worsen.

Will COVID have another resurgence? I have no idea. I don't know, but we'll continue -- I know what we will do is we'll continue to keep our people as safe as we can. We'll follow protocols that are prescribed to us, and we'll work as hard as we can to remain as productive as we can.

Will customer decision-making slow due to all this uncertainty? Quite frankly, I don't think so on large complex projects, especially the ones that have to do with global supply chain repositioning, reshoring, health care, food processing, semiconductors or life safety or pharma. So the major markets that we're playing in today, I do not expect customer decision-making to slow.

I think it is going to require more planning upfront in these uncertain supply chains. We see that already. That's good for us. We have the people that know how to do that thorough planning, and they're expert in contingency planning. In fact, we've gotten a little too good at contingency planning the last couple of years with all the uncertainty.

What will happen with inflation? I think it may moderate as the year progresses, but I think it will be up into the right. And energy markets are as volatile as I have ever seen in my career.

As we move into 2022, as I covered on the previous page, we will continue to be disciplined capital allocators in terms of our organic investments, acquisitions and the return of cash to our shareholders, all of which are important uses of our capital.

As always, I thank you. I thank our employees and our leaders. Thank you for your interest in EMCOR. And with that, we'll be happy to take questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Sean Eastman with KeyBanc Capital Markets.

[Sean Eastman, analyst]

So just starting high level for me, you guys have grown EPS comfortably in the double digits every single year for the past 7 years in a row. We're going into 2022. We've got big momentum in the RPOs.

Industrial Services seems to be inflecting positively. You've got a fortressed balance sheet, but the midpoint of the earnings growth outlook is 6%. So I hear the risk factors, Tony, but maybe just more specifically, how do we wrap our heads around that? Like where is the real sort of contingency built into that initial outlook?

[Anthony Guzzi, executive]

Look, Sean, I think contingency -- and I'll ask Mark to help me here. The way I think about it is it's a macro-driven view. If we do better against those macro items, then we'll move up in the range, and I went through that. So what concerns me, I think any CEO right now, if you're not concerned about supply chain and the unpredictability in the supply chain and what that can do to your labor productivity, then you're not being careful.

I think fuel costs and energy costs are a real wildcard. I thought they were wildcard going into last year. And certainly, what's happened over the last week has certainly not cleared up the energy picture any better for anybody, like we do, that operates a large fleet. We will do our damn best to pass those costs on to our customers.

But remember, we're always doing that in arrears. We can't guess at a fuel price, pass it on to our customers and what largely -- where that most is impacted is a time and material business. And finally, we took a -- COVID took a whack at our productivity in the fourth quarter.

And do I think that's abating? Sure, I do. Do I know it's abating for the year? I don't know. We thought -- I think we had a victory speech last July, and then we had Delta. And then we had another moment of glee, and then we had Omicron. I am not an epidemiologist, never have been. I do know a little bit about numbers. I have no idea what's going to happen.

So I think if you take those potential factors into play, you can end up in a place to say, "Hey, we're going to do well, but maybe not as well as we should have." We feel really good about where our RPOs are. We really feel good about the demand in our end markets. But at the end of the day, we've got to execute in a world of uncertain labor productivity because of COVID, an uncertain material availability because of supply chain. Mark?

[Mark Pompa, executive]

Yes, Sean, the only thing I would add to Tony's commentary has to do around mix of revenue. As Tony commented earlier in this morning's call about how we've moved to a more larger project away from traditional commercial work, well, obviously, when you're project planning that larger, more complex work, you have more contingencies built into your estimates.

We're on the front end of a lot of that work as we enter 2022. Assuming that the project schedules adhere to what was originally anticipated, we're certainly going to have a lot better feel ultimately for the profitability of those jobs as we progress through the full year calendar.

But if the supply chain does continue to rear its ugly head, those project completion time lines might slide into 2023, therefore adding more uncertainty to our estimates. So the work is there. The profitability characteristics have not changed to our detriment. Unfortunately, though, a lot of the uncertainty around the work and how it's going to progress, which is beyond our control, certainly builds in some element of conservatism.

[Anthony Guzzi, executive]

Yes. And Mark, we're working with really rational people right now at the owner and GC and CM level. But they also don't control the supply chain issues.

The only thing I'll take exception, Sean, when you asked your question, when you said we've comfortably grown EPS double digits, maybe we've been grinding and our folks have worked exceptionally hard to do that. So maybe in a virtual work-from-home environment, it's been comfortable EPS growth. But I can tell you, I couldn't be more proud of how our people have executed to put the kind of results we've had in a very challenging environment over the last 2.5 years.

[Sean Eastman, analyst]

Yes. Super helpful. I didn't mean to suggest it was comfortable. I just meant comfortably within the double digits, not that it was a...

[Anthony Guzzi, executive]

I had to brag on my people here a little bit and the great work...

[Sean Eastman, analyst]

No, please by all means. And my second question is, obviously, the RPO growth was a big positive story for you guys throughout 2021. Do you expect that momentum in RPOs to continue this year? I'm just wondering if maybe there might have been a little bit of pull forward in new award activity just as project sponsors looked to secure that contractor capacity. Curious your thoughts there.

[Anthony Guzzi, executive]

It's actually -- we worry about the same observation, Sean, that people want to secure capacity with really blue-chip contractors right now, which I do think there's been a flight to quality. However, if you go back to that page where I talked about those resilient markets, I think we've grown 9 of the last 12 quarters RPOs, which is not that common for us. This could be lumpy. It comes in and it comes out. One large project can move it one way or another.

I do think, though, there's enough significant opportunities out there that we're involved on the front end, and we'll see when they get awarded. It could be a little lumpy. But I feel really good about the opportunities we have in the pipeline that may materialize into significant projects. And we're working as part of a team, right? The project is going to happen, it's just when. And we're 1 of 2 teams that may or may not win it. So the odds are fairly good on some of those projects.

Secondarily, I think one of the things I always look at in the business is what's happening in 2 parts of the business to tell you whether momentum may be a little more broad-based. One of the things we look at is our small project work, which is very strong right now. And so it's saying people are not only spending at the top of the market, they're also spending things they need to do to maintain their facilities, gain energy efficiency and get better indoor air quality in their buildings. So we're seeing that.

Secondarily, I always watch the fire protection business and the fire protection business, because it's a national business, involved in every sector of construction for us. It remains very strong. Now part of that is our position in the market. But the other part of that is it's sort of a national view on some of the more complex work, and that continues strong.

I do think one of the things that's going to continue to drive people maybe to want to make decisions is what I said in my closing. And that is that a lot of these decisions have to be made. People are still well capitalized. And the kind of people we work for, for the most part -- I mean sometimes maybe we thought they were better capitalized than they are, but that's not very often. They need to get this work done.

There's a major repositioning going on to support the new investments in the energy transition, but there's also a major repositioning on traditional supply chain that, quite frankly, I haven't -- I only saw my career on the way out, where people were moving from high-cost states to low-cost states and maybe to Mexico and eventually out to Asia.

Now you're seeing it in reverse, still going to lower-cost states. And we've really made some pressured investments in there in the mid-2000s and in the last 3 or 4 years, and we sort of got ahead of the curve.

[Operator]

Your next question comes from the line of Noelle Dilts with Stifel.

[Noelle Dilts, analyst]

So maybe a bit too detailed, but I was wondering if you could talk about how you're thinking about sort of expected segment margin ranges embedded in your guidance in '22. When I look at 2021, your margins really held in pretty well in all of the segments, with the exception of Industrial. So I'm just really trying to get a sense of how do we think about Electrical and Mechanical margins going forward?

And then with Industrial, obviously, you go back quite a few years, but we were talking about mid-single-digit levels. When can we think about that division maybe getting back toward those mid-single-digit types of -- mid-single-digit type of range.

[Anthony Guzzi, executive]

So I'll take a shot at a macro level, and then will kick to Mark relatively quickly here. I think that we're very comfortable thinking we can operate within our 3-year averages on all of our segments with the exception of Industrial. There, we expect...

[Mark Pompa, executive]

To be better.

[Anthony Guzzi, executive]

To be better. And 3-year averages for us can have 40 to 50 basis points of flux in it, right, Mark? And it's not a quarter-to-quarter business. And like Mark said, some of it has the timing on large projects, when they end, when they start, the contingencies built in and then the acceleration of the small project portfolio. So Mark, I'll throw it to you.

[Mark Pompa, executive]

Yes. Noelle, this is grounding, in fact, so to speak. So when you look at full year 2021 by segment, as I mentioned earlier, both Electrical and Mechanical Construction are operating above their 3- and 5-year averages. If you look at the back half of 2021 performance, that trend is not as consistent. So Electrical Construction's last 6 months of 2021 was actually below those averages.

My anticipation, and obviously, when we did the financial modeling for purposes of 2022 planning, we're looking at -- and as Tony indicated, we're looking at margin performance consistent with really what it's been in the last 3 years. So that would put Electrical Construction around 8.25%, hopefully slightly higher. Mechanical Construction, that gets you somewhere around 7.75% to 8%.

So on a blended rate, when you look at total Construction, it's just either slightly below 8% or up to 8.2%. So that's still a very good performance. When -- I think we all get jaded looking at the last few years and say, okay, that's this reality, the new reality. And as much as I think the EMCOR team would love that to be the situation, we don't control the market. And we're in a sweet spot on some things as Tony covered in depth, but that's not going to continue into perpetuity.

But when you look at 2022 from a framework perspective, it doesn't look like we're going to see any softness, so to speak, with regards to demand and opportunities.

When you look at our U.S. Building Services, the 2021 performance was slightly below the 3-year or 5-year average for -- once again for the reasons that we've already discussed. Clearly, supply chain difficulties have been the most impactful there. And because there's a fairly significant nonunion labor component to that segment, our ability to shift resources around is good. But if we have labor on-site and materials and equipment are not there for installation, because they're being procured by somebody other than the EMCOR subsidiary, we're still on the hook for payment for that labor, which is not obviously being very productive.

So we continue to -- the project management, which is a center of excellence for EMCOR and has been for -- I don't want to say my entire history with the company, but for a long part of my history with the company. So I'd like to think that they're going to somewhere settle around that 5% range.

And then as Tony indicated, Industrial, certainly, the last 3 or 4 years have been anything but steady for a lot of exterior reasons that we've discussed ad nauseam in prior calls. But their 3-year average is below 2%. I think we would be very unhappy if that's where the profitability of that segment resulted in 2022. But as we mentioned I believe in last call, as much as I like to be able to shoot back to the mid-single digits, you have to walk before you can run.

[Anthony Guzzi, executive]

Kind of get 4% first.

[Mark Pompa, executive]

Yes. So we're certainly trending in that direction. But I think, unfortunately, we've all been collectively disappointed for a lot of different reasons, some through our own fault, most through others' fault. We're not ready to declare victory quite yet in that segment. But we'll obviously have more to talk about as we progress through the year.

And the U.K. has been probably the most steady of all of our businesses when you look at variability in margins period-to-period. And they're well above their 3-year average, which is just below 5%. And we'd like to think that 5% or 5.5% range is what our expectations are certainly in the near future.

So probably a long answer to a short question. But we're right where we want to be. And once again, assuming project time line, certainly on the larger work progressed as planned, we certainly would think that there's going to be opportunity for improved margin performance relative to how we closed the 2021 period, specifically looking at the back half of the year.

But once again, we're going to do everything that we can to control the outcome of those things. But unfortunately, a lot of that is dictated by others and outside influences.

[Operator]

Your next question comes from the line of Adam Thalhimer with Thompson, Davis.

[Adam Thalhimer, analyst]

Nice quarter.

[Anthony Guzzi, executive]

Thanks, Adam.

[Mark Pompa, executive]

Thanks, Adam.

[Adam Thalhimer, analyst]

Tony, what are you guys hearing -- what are you hearing from industrial customers? I'm sorry if I missed that, but just curious what they're telling you in terms of project activity this year.

[Anthony Guzzi, executive]

Refining and petrochemical?

[Adam Thalhimer, analyst]

Yes.

[Anthony Guzzi, executive]

Okay. Because we have more industrial customers than just EIS.

[Adam Thalhimer, analyst]

Feel free to take it wherever you want.

[Anthony Guzzi, executive]

Well, I've covered the other ones a lot, right, in my commentary. Look...

[Adam Thalhimer, analyst]

No, no, I meant the ones in the Industrial segment, correct.

[Anthony Guzzi, executive]

Yes. What we're seeing is what we expected for the first quarter, right? We said we're going to continue to sequentially get better. We've said that a number of times. I think we've called it about right. I think they're spending money again. We're clearly in a very good position. I said what I said for a very specific reason in my text. We kept the team together, which is a real credit to the leadership there. It's been a rough 2 years. But we kept the team together. They're executing.

I think the year looks pretty good. It looks like a normal year of turnaround activity. Will they run harder and do less turnaround work in the fourth quarter because gas prices are so high? I don't know that. I think they're going to do their maintenance, to be honest with you.

I think the other wildcard in that segment is we're not seeing it yet. We're seeing a small return to upstream. We see that in our Electrical business in that segment. I do expect and our people who know a lot more about this because they live it every day. We have experts in this. They expect somewhere around third and fourth quarter to see a resumption of drilling in the Permian and the Eagle Ford and a little bit North Dakota, the Bakken. That will help us. That's the part we don't have baked into anything yet. That would be upside into our business.

So I think they're ready to spend money. I think they believe they are long-term winners, the Gulf Coast refining and petrochemical complex. Let's hope for no weather events here in hurricane season, and we should have a pretty good year.

[Adam Thalhimer, analyst]

Okay. Super helpful. And then -- so I'm curious, with the supply chain issues and the inflation that you started to see in the back half of 2021, what did you do differently when signing new contracts? And I guess, the question is also kind of surrounding what you think your margins are in backlog and kind of how protected you are from those issues this year?

[Anthony Guzzi, executive]

Look, I think on the larger workforce protected as it can be. So here's what changed. And this changed for us in the first quarter of last year or maybe even the fourth quarter of '20 because we saw some of this coming. First thing we did is we don't let prices out there for more than -- depending on the kind of job, 7 to 20 days when before we would leave them out there 30 to 60 days. So the amount that we'll honor a quote, especially on a small project work, came in.

So we can honor -- and when we do that, we typically are almost brought out on the job, which means we have commitments, especially on the small project work from our suppliers what we're going to pay.

As you get to the larger work, there's a couple of different ways you contract it. And you either do it fixed price or you do it GMP, which looks like a fixed-price contract, but it has built-in negotiators for increases in materials and things like that. And more and more contracting has been happening that way on the larger projects because we can't guarantee what the price is going to be. And people are rational, and they know we're about as good as anybody in the business of procuring materials.

But just as -- so there's all kind of things like that. And we have all kind of contingencies built in if deliveries don't happen that you wouldn't typically have seen in the past. And people are knowledgeable, and we do a really good job through our central procurement group of keeping lead times in front of people so that they can negotiate with their customers then about what lead times look on critical materials.

So long-winded answer to how I feel about what's in backlog, I feel about as good as I could feel. I think we've done everything we can to protect ourselves. I think we priced it correctly. And I think we have as about as good terms as we can get in the environment that we're in.

And I think our owners have been fair, and I think our general contractors and construction manager customers have been fair. I mean a lot of these people want us to do the job because we're going to get it done. We're going to get it done right. And we have the technical capability first, the project execution capability. We have the ability to get the labor. And quite frankly, we have the financial strength to do it.

People on these large projects actually look to our balance sheet as a point of strength. And it's one of the reasons they contract with us because they know that work is going to get done. We've -- we compete with that.

And secondarily, Adam, I think that the biggest wildcard for us this year is things that we don't control, right? I have no idea what's going to happen with COVID, and I'm done projecting that and predicting that. And the supply chain, it's not just pricing in the supply chain, which we can get our head around, availability is more the issue. Someone will make a promise to you. Mark talked about it a little bit. The large project work, we have the chance to sequence things different. We have a chance to lay out the workforce a little different.

When you get to the smaller project work or the quick turn work, which may not be a small project where we hit up with a lot of labor, the problem we run into it, if a critical piece of equipment doesn't come in on time, that can really change things out in a retrofit environment. Because a lot of time in a retrofit environment, yes, you're competing on price sometimes, but you're really competing on the least amount of disruption to the facility to keep it operational.

And you really go through -- even on a small, you go through very detailed sequencing and planning to do that. You have labor lined up to work over time. You have labor lined up to work weekends. And man, if you miss that by a day or 2, you've -- in for 8 guys, 2 days of labor, you do that over 10 projects, the math becomes sort of ugly pretty quickly. That's the biggest challenge the mechanical service business has had over the past 6 months. And they're as good as anybody in the business of figuring that out.

But we have transparency with our distributors. We have this transparency with our equipment suppliers. Their factories and their OEMs disappoint them, too. And so what's causing it in the factories and the OEMs? A lot of times, it's their ability to bring in materials, but a lot of times it's disruption from COVID in their factories and they're not producing to the level they thought they were going to a mere 2 weeks earlier.

[Operator]

And your next question comes from the line of Brent Thielman with D.A. Davidson.

[Brent Thielman, analyst]

Just one last from me. Tony, I was thinking about your prepared remarks and, in particular, some of the investments you've made in the past that seem to be sort of helping you through all of that noise in the market right now inflation, et cetera. Can you talk about -- I mean just given the state of the balance sheet and perhaps less sort of attractive M&A opportunities out there right now, some of the programs or things you're putting money toward today that might benefit you in the future? I mean anything there worth talking about that...

[Anthony Guzzi, executive]

Yes, absolutely. We continue to build out our fire protection prefabrication capability. We have 4 strategically located facilities now. That will probably be 6 within -- we'll put 2 more in over the next probably 12 months. We continue to enhance our prefabrication in our mechanical and electrical operations.

On the mechanical side, we probably have 12 significant shops; on the electrical side, 6. We'll take more square footage, and we'll be doing more things in the shops versus the field. And we'll be doing them on a larger scale to become more modular as we serve these larger projects.

Also training, right? It's a soft cost, but it's not for us. We're going to ramp back up our executive training on our company values and our leadership and also our business acumen. We've been on a 2-year hiatus because of COVID. That will start again here in the second week of March and last week of March.

We view those as critical to building our culture, which many people consider a softer investment. We do not. We consider it a hard investment. And we think that, more than anything, helped carry us through these last 2 years.

We're going to continue to invest in BIM. We've actually put a couple of full-time resources. We put a terrific leader in charge of our BIM initiative. It's actually under one of our key segment leaders, Joe Burns, who runs mechanical, guides that, probably knows more about that than anybody in the industry. We've enhanced our relationship with Autodesk, and we will continue to push the frontier on our scale that we do.

We will continue to do more mechanical service training. We're doing some very creative things around mechanical service training and training of our field technicians in general to bring them up. We have some virtual training that we've enhanced. And we also put more money into our applied equipment training center in Arizona, which we expect to ramp back up here in the end of the first quarter.

And on the people side, we're investing in project management. So those are all the kinds of things we do, and I'm probably missing a couple of things. Those are the kinds of things we do to build capability that we hope continue to differentiate us in the market.

Now look, acquisition is sort of a critical part in that, too. Sometimes we can bring all those tools to the acquisition. Sometimes we learn from the acquisition, right? It works both ways. When we bought B&K down in the Southeast, they were probably a little ahead of it. We thought we were pretty good at prefabrication. They were a little bit ahead of us, especially with some of their shop automation. We took those lessons and took them to other parts of our mechanical business.

So acquisitions play a critical role in our ability to not only expand our geographic and technical reach, but also another way to learn. And then one of the big synergies you get is to take our learning, and usually, our acquisitions are hungry to get that learning from us.

[Operator]

All right. I'll hand the call back to Tony Guzzi for any closing remarks.

[Anthony Guzzi, executive]

All right. Look, thank you all. Thanks for listening. And thanks to all the EMCOR folks out there listening. We're going to try to knock it here in the first quarter and hope for another great year. And we're set up to do pretty well. But hey, we'll face headwinds. We always figure out a way to get through them. With that, have a good day.

[Operator]

Thank you. And that concludes the EMCOR Group Fourth Quarter and Full Year 2021 Earnings Call. You may now disconnect.