Q4 2019 Earnings Call
Good morning, My name is <unk> and that will be a conference operator today.
Time, I would like you're welcome everyone to cope with fourth quarter and for your tiny 19 earnings call.
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Thank you Laura and good morning, everyone. Welcome to the EMCORE Group Conference call. We are here today to discuss the company's 2019 or fourth quarter and full year results, which are reported earlier. This morning, I would like to turn the call over to Kevin Mats Executive Vice President of shared service as well introduce management Kevin. Please go ahead.
Thank you Jamie good morning, everyone welcome to our earnings call.
And I hope you have arrived at the Internet site, Oh, well, we hope you have arrived there where we have our slide presentation that will accompany our remarks today, please advance to fly to.
The presentation discussion contains forward looking statements in certain non-GAAP financial information page two of the flights described in detail. The forward looking statements in the non-GAAP financial information disclosures I encourage everyone to review both disclosures in conjunction with our discussion in a company slot.
Slide three depicts executive tour with me to discuss the fourth quarter and full year 2019 results. They are Tony Gotti, Chairman, President and Chief Executive Officer, Mark Pop, our executive Vice President Chief Financial Officer and Treasurer.
<unk> Senior Vice President General Counsel Maxine Mauricio.
Call participants not accessing the conference call be or the Internet. This presentation, including the slides will be archived in the Investor Relations section of our website under presentations.
You can find if it EMCORE group dotcom with that said, please let me turn the call over to Tony Thanks, Kevin and I'm going to focus my discussion on the full year results Mark will pick up some of that and he also speak to the fourth quarter of 2019 in detail I'm gonna be covering up front here pages for through share.
Overall, we had a terrific 2019, we finished the year in good shape with record financial performance on almost any relevant metric we set records for revenue at 9.17 billion.
Operating income at 461 million.
Net income 325 million an earnings per share from continued operations a $5.75. We had record bookings of 9.1 billion at overall revenue growth of 12.8% with organic revenue growth in the year of 9.3%.
Cash flow from operations of 356 million, which exceeds our net income we leave 2019 with flat remaining performance obligations for our Peos from a year ago period, which is quite good considering a strong organic rubber growth that we had in 2019.
Our team executed extremely well and made the most of the opportunities that we had to serve our customers.
We also executed well and that we matched our record annual operating income margin of 5.0%, we exit the year with a robust balance sheet and flat remaining performance obligations up 4.036 billion, despite that exceptional organic revenue growth.
Into such strong organic growth in 2019, where acquisitions totaling 300 million dollar of purchase price.
Now I'm going to focus my discussion on segment performance for the year.
Mechanical and electrical construction segment had another great year, and we continue to execute well in these segments on a combined basis. We grew revenues to 5.6 billion with underlying growth of 13% with organic growth of 9.3%.
Operating income margin was a strong 7.0%, we're winning small midsize and large projects across all geographies and end markets. We had strength in our commercial markets inclusive of Datacenters, we are winning work and our successfully many of these jobs with skilled trades book skilled trades people and.
This tight labor market, we are using distressed to build our workforce the future as our growth provides the opportunity develop informant and project managers.
I've mentioned before we see our acquisitions as an opportunity to continue to fill in our white space and also built capability in our existing markets to that Ed in 2019, we executed three important acquisitions in these segments.
It expands not only our geographic footprint.
That is Iowa, the southeast lower Midwest and an increased presence in Texas, but also enhances our technical and production capabilities.
The integration of each of these companies is progressing well.
Turning to the building services segment in 2019, we had our best operating income margin performance at 5.4%, we had 12.3% revenue growth that helped to lead to a 22.3% increase in operating income versus a year ago period, we had excellent growth in performance in our mechanical service.
His business improved performance in our commercial site based business and our government business held its own in an evolving market, we acquired and successfully integrated for companies in 2019, establishing a new geographic presence and excellent take technical capabilities with age we have transitioned several large maintenance contract well.
In our commercial site based business.
Our industrial service segment had much improved annual performance and our trajectory has improved pros Harvey, which really affected early 2018, we had very strong revenue and operating income growth and our serving our customers well. We also have launched several new service offerings things, which quickly getting new customers.
And increased our customer penetration as they know the EMCORE industrial services team can deliver we also have added to a new important cleaning capacity to our Louisiana facility, the drive repair and clean revenues.
Our UK segment had concise continued to perform well and we're quite proud of our team for how much we ever approved and how well the business performed well we have built a leading franchise in the UK. There's no for delivering complex facility maintenance solution is to some of the most technically sophisticated owners in the UK with that I'll try.
Turn it over to Mark and he'll provide more color or are the 2019 financial results Mark. Thank you Tony and good morning, everyone participating on the call today.
For those accessing this presentation by the webcast. We are now on slide seven.
Over the next several slides I will provide a detailed discussion over fourth quarter 2019 results before moving to our full year 2019 performance some of which Tony outlined during his own <unk> opening commentary as a reminder, all financial information discussed during today's call is included in our consolidated financial statements within both our earnings release announcement and form.
10-K filed with the Securities Exchange Commission earlier today, so lets discuss I'm course fourth quarter performance.
<unk> revenues of 2.4 billion in quarter, four are up 174.6 million or 7.8% over 2018, our fourth quarter results include nine to 3.5 million of revenues attributable to businesses acquired pertaining to a period of time that such businesses were not owned by EMCOR and last year's fourth quarter.
Position revenues positively impacted each of our United States electrical construction, United States mechanical construction in United States building services segments, excluding the impact of businesses acquired fourth quarter consolidated revenues increased 81.1 million or 3.6% organically.
All of them pours reportable segments other than our industrial services segment experienced revenue growth during the fourth quarter of 2019.
At this stage electrical construction revenues of 564.5 million increased 30.4 million or 5.7% from quarter 420 18.
Excluding acquisition revenues were 27.7 million. This segment's quarterly revenues grew organically one half a percent versus the prior year revenue gains within their manufacturing institutional commercial and health care market sectors were substantially offset by revenue declines within the transportation hospitality and water market sectors due to the.
Completion or substantial completion of certain large projects during 2018 or early 2019.
The United States mechanical construction revenues of 895.6 million increased 100.9 million or 12.7% quarter for 2018.
Excluding acquisition revenues of 44.4 million the segment's revenues increased 56.5 million or 7.1% organically as I had mentioned during each of our quarterly calls during 2019 revenue growth within the U.S. mechanical construction segment remains broad based across most markets sectors with revenue gains from all sectors other than hospice.
Halladay contributing to the overall increase in quarter four revenues.
This segment's revenue performance represents an all time quarterly record for U.S mechanical construction segment and surpasses the record set in 2019 third quarter.
And of course total domestic construction business fourth quarter revenues of 1.46 billion increased 131.3 million or 9.9% with 4.5% of such growth being generated from organic activities.
The United States building services revenues of 539 million increased 53 million or 10.9% excluding acquisition revenues of 21.4 million. This segment's quarterly revenues increased 31.6 million or 6.5% organically revenue gains within their mechanical services and commercial site based services divisions were partially.
Offset by a revenue decline within the government services division due to a smaller contract days, which resulted in lower indefinite duration indefinite quantity project opportunities. Additionally, revenues of the segments Energy services division declined quarter over quarter due to reduced large project activity in 2019 fourth quarter similar to are you.
Mechanical construction segment revenue performance within the U.S. building services represents an all time quarterly record for this segment.
I just states industrial services segment revenues of 299.3 million decreased 13.3 million or 4.3% as a result at the cyclicality of our customers planned maintenance schedules, which led to lower turnaround activity quarter over quarter. In addition, within our shop services operation. This segment experienced a decline as shipments of new.
Build heat exchangers as well as a decrease in repair volumes, partially driven by the reduction in quarterly turnaround activities just referenced.
United Kingdom building services revenues of 105.5 million increased 3.6 million or 3.6% due to incremental revenues from new maintenance contracts as well as an increase in project and repair activities.
Pat the foreign currency exchange rates were were relatively neutral quarter over quarter.
My last statement a fourth quarter revenues is that our 2.4 billion a quarterly revenues as both the fourth quarter and of all time quarterly revenue record for EMCOR.
Please turn to slide eight.
Selling general and administrative expenses of 240.9 million represent 10% the fourth quarter revenues reflect an increase of 20 million from quarter. Four 2018. The current years quarter includes approximately 8.6 million an incremental SGN a inclusive of intangible asset amortization from businesses acquired resulting in an organic core.
Quarter over quarter increase of approximately $11.4 million. This organic increase was primarily due to higher employment costs, mainly as a result in an increase in headcount to support our organic revenue growth as well as an increase in certain non income based to state taxes.
Adjusted operating income for the quarter of 122.9 million represents 5.1% of revenues and compares to 113.6 million or 5.1% of revenues in 2000 eighteens corresponding period.
2019 fourth quarter operating income represents an all time quarterly record for EMCOR and represents an 8.1% increase over last year's quarter I will cover the details of each or of each of our reportable segments operating income an operating margin performance as I continue through this slide first our U.S. electrical construction segment, how to operating income of 40.
1.3 million, which increased by 8.2 million from the comparable 2018 period reported quarterly operating margin of 7.3% represents a 110 basis point improvement over 2018 fourth quarter.
Quarter over quarter growth in gross profit from commercial industrial and institutional market sector project activities inclusive of the telecommunications and power sub market sectors more than offset gross profit contraction within the hospitality market sector due to the completion of certain gaming projects in 2018.
2019 fourth quarter U.S. mechanical construction services segment operating income of 68.9 million represents a 5.3 million or 8.3% increase from last year's quarter.
Operating margin of 7.7% decreased by 30 basis points period over period, partially as a result at the change in revenue mix as 2019 fourth quarter included a higher percentage of large projects in the earlier stages, the completion, which typically reflect lower projected gross profit margins. The projects that are approaching the latter stages.
Please.
Our total you watch construction business is reporting a 7.5% operating margin or hotter and 10.2 million of operating income, which has increased from 2018 fourth quarter by approximately $13.5 million operating income for U.S. building services of 24.2 million represents 4.5% of revenues and as an eight.
100000 dollar reduction from last year's fourth quarter operating margin decreased by 60 basis points due to a slight reduction in gross margin as a result of change in the revenue mix, primarily within our energy and government services Division divisions, as well as an increase in selling general and administrative expenses due to severance expenses incurred.
Associated with certain personnel changes that do not qualify for restructuring treatment.
Are you asked industrial services segment operating income a 13.1 million represents 4.4% of revenues and as a 2.2 million dollar reduction from 2018 fourth quarter.
Lower quarterly revenue in addition to an adverse and judgment.
Connection with the joint venture dispute were the primary reasons for the reduction in both operating income an operating margin quarter over quarter.
UK building services operating income of 4 million represent 3.7% of revenues, which is an improvement of $900000 and 70 basis points of operating margin over 2018 fourth quarter. This segment's quarterly operating performance was favorably impacted by strong project activity. In addition to incremental revenues from new customer awards and 29.
We are now on slide nine.
Additional key financial data for the fourth quarter not addressed on a previous slides are as follows quarter. Four gross profit of 364.7 million represents 15.2% of revenues, which is approved from the comparable 2018 quarter by $28.6 million quarterly gross profit margin has improved by 10 basis points primarily due.
To favorable project execution year over year within our U.S. electrical construction segment, partially offset by slightly less favorable revenue mix during 2000 niches fourth quarter within our U.S mechanical construction segment.
Restructuring expenses in 2019 of approximately $1 million pertain to the continuing a realignment of management resources within our U.S. billing services and U.S. electrical construction operations.
Got it earnings per common share from continuing operations for 20, 904th quarter is $1.54 cents as compared to $1.38 cents per diluted share a year ago. This represents a 16 cents or 11.6% improvement quarter over quarter.
Our tax rate for quarter, four up 2900 is 27.8%, which is lower than the tax rate for the corresponding 2018 period due to certain discrete items in the prior year. We finished 2019 with 178.8 million of operating cash flow in the fourth quarter.
This resulted in year to date operating cash flow 355.7 million, which Tony referenced earlier, such amount exceeded 2018 full year operating cash flow performance by nearly $83 million. We're now on slide 10.
The fourth quarter commentary complete I will now augment tone on Tony's full year 2019 commentary.
Consolidated revenues of 9.17 billion are up 1.04 billion or 12.8% as compared to 8.13 billion in 2018 annual period acquisitions contributed incremental revenues of 290 point threemillion pertaining to the period of time, the such businesses were not owned by EMCORE in 2018 and positively.
Pat that all of our reportable segments other than our U.S. industrial and UK building services segments, excluding the impact of businesses acquired year to date revenues increased organically 753.7 million or a strong 9.3% for full year 2019, we achieved revenue growth throughout all of our reportable segments with also.
Segments other than our UK building services segment, achieving annual growth rates in the double digits U.S. electrical construction revenues of 2.22 billion increased 262.3 million or 13.4%.
Acquisitions contributed 134.5 million, an incremental revenues, resulting inorganic revenue growth of 6.5% substantial revenue growth within the commercial manufacturing and institutional market sectors more than offset revenue declines within the transportation healthcare hospitality and water market sectors.
Must mechanical construction revenues of 3.34 billion increased 377.5 million or 12.7% compared to 2018 acquisitions contributed $49.1 million of incremental revenues, resulting in an organic revenue increase for our U.S mechanical construction segment in 2019 up 11.1%.
Significant revenue growth across most markets sector is more than compensated for the revenue declined with the the hospitality market sector, which resulted from the completion of certain large projects in 2018 US building services revenues of $2.11 billion increased to 231.4 million or 12.3% acquisitions contributed 106.
7 million of revenues, resulting in a year over year organic revenue increased 6.6% strong project the service growth within the segments mechanical commercial site based and energy services divisions more than offset revenue decline within their government services division due to attrition within their contract base U.S. industrial services annual revenue.
As a 1.09 billion increased 164.4 million or 17.8% compared to prior year due to increased maintenance and capital project activity within their field services operations as a result of the normalization of demand patterns in 2019 as the first half in 2018 as Tony mentioned was.
Got it but the carryover effect of Hurricane Harvey.
Our UK building services segment 2019 revenues increased 2% to 423.3 million, primarily as a result of new maintenance contract awards within the institutional and commercial market sectors. This segment's year over year revenue growth was despite a 19.5 million dollar headwind due to unfavorable foreign currency exchange movement.
For the pound Sterling.
Please turn to slide 11, selling general administrative expenses of 893.5 million represent an increase of 94.3 million as compared to the 799.2 million reported in 2018. This increase includes 35.1 million of incremental SGN out related to businesses acquired.
Inclusive of intangible asset amortization as a percentage of revenues SGN as 9.7% in 2019 compared to 9.8% for the 2018 annual period year over year increase in ESG DNA is due to an increase in employment costs as a result of growth and our indirect labor personnel, which was required.
To support our organic revenue growth as well as higher expenses associated with companywide incentive compensation plans due to our overall increase in profitability. Additionally, on a year over year basis, we have seen an increase in professional fee expenses due to certain ongoing initiatives and progress 2019 year to date operating income is 460.
<unk> point 9 million or 5% revenues and represents a 57.8 million dollar increase over 2018 annual performance.
Reportable segments are reporting higher operating income at a higher operating margins year over year other than our U.S mechanical construction services segment, which despite an increase in annual operating income is reporting a decline in operating margin, which I will address as I move through my commentary segment by segment, starting with our U.S. electric grids construe.
Auction segment 2019 operating income is 161.7 million, which represents an all time segment record and is an increase of 22.3 million or 16% compared to the prior year operating margin for 2019, a 7.3%, which is 20 basis points higher than 2018, 7.1% operating margin.
Increased profitability from the commercial market sector inclusive of certain telecommunication project activity as well as the manufacturing and institutional market sectors, offset the contraction and transportation healthcare and hospitality market sector returns due to the completion of several large projects in 2018 us mechanical construction operate.
The income of 225 million increased 5.2 million or 2.4% over 2018 levels and represents 6.7% revenues similar to our U.S. electrical construction segment. This segment's annual operating income represents record performance. The increase in operating income for 2019 was primarily due to an increase.
Recent revenues and associated gross profit within the commercial market sector as well as the institutional and water market sectors. The reduction in operating income margin is due to our current revenue mix, which includes a greater percentage of large projects in the earlier stages. The completion. In addition operating margin for the prior year was favorably impacted by successful project.
Closeouts in 2018 fourth quarter within the manufacturing and hospitality market sectors US building services 2019 operating income of 114.8 million increased 20.9 million or 22.3% due to increased profitability within each of their operating divisions other than government services as a result.
The revenue growth and improved service contract and project performance operating margin for full full year 2019 of 5.4% compares to 5% in the prior year represents a 40 basis point improvement as Tony previously mentioned this segment's performance established new annual records for both operating income and operating margin.
You asked industrial services 2019, operating income increased 16.7 million to 44.3 million or 4.1% revenues year over year increase is attributable to higher gross profit from the segments field services operations due to a more normal demand pattern for our turnaround services, including capital project actually.
Cities throughout 2019, the improvement in field services profitability offset a decrease in operating income from this segment's shop services operations, which resulted from a reduction in new build heat exchanger sales year over year.
Okay building services operating income of 18.3 million or 4.3% of revenues increased 2.4 million due to an increase in gross profit from project and service activities within the commercial market sector, resulting from increased scope with existing customers as well as new contract awards. This segment's operating income was negatively impacted by approximately nine on.
$1000 of unfavorable exchange rate movements for full year 2019 related to the valuation of the pound Sterling. We are now on slide 12.
Additional key financial data on slide 12, not addressed during my full year commentary is as follows year to date gross profit of 1.4 billion is greater than 2018 gross profit by 150.4 million, while gross profit margin of 14.8% is consistent year over year total restructuring costs of 1.5 million or reduce.
Just from 2018 activity.
Diluted earnings per common share from continuing operations as $5.75 compared to $4.89 per diluted share a year ago, adjusting 2018 to earnings per share for the noncash intangible asset impairment loss of approximately $900000 non-GAAP diluted earnings per share from continuing operations would have been for Don.
There's a 91 cents in 2018, when comparing the current Irrs diluted earnings per share from continuing operations to 2018 is adjusted number 2019 represents an 84 cents increase or 17, 117.1% year over year EPS improvement.
We are now on slide 13.
Enforce balance sheet continues to maintain its strength with strong liquidity a modest leverage variations of note from December 31, 2018 are as follows cash of approximately 359 million is roughly in line with Decemberthirty. One 2018 as a result of strong operating cash flow, which has offset cash used in Houston.
Investing and financing activities, including approximately 301 million of cash expenditure for acquisitions 48.4 million of capital expenditures and approximately 18 million of dividend payments to shareholders working capital levels and increased year over year, primarily driven by growth in accounts receivable on contract assets related to our continued.
Strong revenue growth goodwill has increased primarily as a result of the seven businesses acquired during 2019 net identifiable intangible assets and increased as well due to the two our acquisition activity, partially offset by 48.1 million of amortization expense recognized in 2019.
Total debt, excluding operating lease liabilities is 312.2 million and has increased 16.5 million from December 31, 2000, $18 million to $25 million of net borrowings under our revolving credit line to facilitate our acquisition program, partially offset by our mandatory quarterly principal repayments.
Under our outstanding term loan as a result of our outstanding borrowings we have a modest debt to capitalization ratio of 13.2% at December 31 2019.
EMCORE had outstanding cash flow performance during 2019, which allowed us to successfully complete a series of acquisitions during the year without increasing our leverage profile. We now began 2020 with a strong balance sheet and our earnings base that affords us the ability to take advantage of all the opportunities in front of us with my prepared commentary concluded.
I will return the call to Tony Tony Hey, Mark.
And here fourth quarter, there's lots of talk about and it's always nice to talk about a record year.
I'm going to be on page 14.
And its remaining for performance obligations.
In short we continue to see opportunities in the non residential market as we move into 2020.
Total ARPU is at the end of the fourth quarter were 4.04 billion up 73 million or just about 2% when compared to the December 2018 level of 3.97 billion.
Book to Bill measuring fourth quarter ARPO total over third quarter ARPU was over one which is fairly strong activity when measured against our fourth quarter revenue of over 2.4 billion.
Yeah. We've said this a lot our business is not a quarter to quarter business and never has been it never will be it very much depends on the flow of our projects at our maintenance operations. We have largest small construction projects, we have time and material work that is not part of our IPO.
That drives that RPL activity, we have operations and maintenance services, we have industrial services that lead to projects overlaid on the night RPL markets. We report one way to look at our success in 2020 is to look at the average ARPU goes in 2020, we expect overnight team.
Average ARPU rose in 29 team was $4.11 billion versus an average of 3.80 billion in 2018, given given our various.
Segments generated 12.8% year over year revenue growth.
Means to me, we are executing large and small faster Bernie projects at a very high level and we continue to see those opportunities ahead again as we've said before I believe a longer Leds is a better gauge for our success domestic rpos have increased roughly 2% or $80 million just December 2018.
Our construction segment ARPO activity, just a little under breakeven from third quarter of 2018, despite having year over year growth of over 9%.
Addition to seeing demand for larger more complex project opportunities. We can use to see robust demand and are building services segment as its up almost 107 million. Most of this growth is supported by Hvdc retrofit voting control projects and repair and maintenance improvement projects at our mechanical services business all.
This work centers or our customers desire desire to improve the efficiency cost effectiveness and comfort other hvdc building a control systems.
On the right side of the paid we show our Peos by market sector. As noted the segmentation of the 2019 bar closely resembles the 2018 sector market participation.
Market sectors continue to offer opportunities and slight up or down year over year variances look more like market timing the market's office softness.
With that being said, we did see some good growth in healthcare projects. In 2019 again. These are very large complex projects well suited for many of our companies as we move into the year our markets remain active and bidding activity remains strong in general we believe with most nonresidential forecast that the market will grow and low single digits.
With variances between the AI classifications of commercial education healthcare industrial we are nicely position in each of these large market segments.
As we go into the ended the year.
Pager Im going to close these remarks on pages 15 and 16.
As we start 2020, we continue to believe we are well positioned to deliver strong operating performance.
We believe the non residential market has enough growth and it's going to be well, we think about 1% to 2% to provide us opportunities to reform for our customers other specialty construction building service and industrial service needs.
We think the turnaround season will be normal again this year and we are in the middle of a pretty good freeing turnaround season, and we do expect a decent fall turnaround season.
Against this backdrop, we will set an initial revenue guidance at 9.5 to 9.7 billion.
Our initial earnings per diluted share from continuing operations guidance will be $5, a 60 cents to $6 in 30 cents our ranges based on potential outcomes on the patient timing of work we have already one coupled with the work we will need to win and execute in 2020.
The question is always how do we moved from the low end to the mid point to the.
Hi end of the rate.
I will always like to the segment the discussion into two buckets buckets, what we can't control and what we cannot control first I'll discuss the things we can't control, we always cauca bottom controls.
As always our customers may slow down investments in capital projects due to election year uncertainty here in the United States for the general economic environment to slow down as we progressed through your Ed for we have a significant job site condition or operating condition outside the norm or what we can control.
So far the impact has been minimal and we expect it will continue to be were also a subjects to external factors, whether it be tariffs last year or this year the corona virus.
Now moving on to things that we do control and Thats really where we put our focus and that may or impact our ability to meet the midpoint or high end of our guidance range first we must maintain cost discipline and look for every opportunity to drive labor productivity.
We need to win and bit our share of large project work that will also take advantage of our skill and expertise and almost any end market from commercial inclusive of datacenters to healthcare to transportation to manufacturing.
We need to have a decent fall turnaround season, and we have to have the opportunity to execute small project capital work in late Q2, three and Q2.
And that is pretty common are small project work needs to continue to have strong growth and we must continue to execute well on our large multi site maintenance contracts.
However, I do have a high degree of certainty that we will continue to execute drive productivity and where our share of project work.
With respect to capital allocation I always refer to look at this in two to three year cycles.
And across that time, we've had the opportunity to have had pretty balanced capital allocation between acquisition growth capital and returning cash to shareholders across 2018 to 19, we executed 373 million and acquisitions and thats their purchase price.
Across our construction and US building services segment, and we returned approximately $253 million cash to our shareholders through dividends and share repurchases in 2020, our capital allocation priorities remain the same.
And to note we have a decent pipeline of actual is acquisitions similar to those executed in 2018 to 19, and we also have the flexibility to return cash to shareholders.
Finally, we before we begin our Q in AG, Let me make a brief comment on the systems intrusion, we recently experienced.
As we previously disclosed on February 15th we determined that we were the target of our radio ransomware attack affecting certain of the company's IP systems with malware.
As a precautionary measure we properly shut down certain systems to help contained the problem.
We implemented our business continuity plan as design and they operated as design the focus of our pledges to maintain field productivity and customer service and we have kept barfield operations near 100% productive.
We are measured Lee, bringing our systems back online, which will help to fill facilitate improving back office operations and while our investigation is continuing we see no direct evidence that either employee or customer data has been taken in the attack.
Through Council, we have retained a leading cyber security forensic firm to assist us we do not have a specific timeline for the completion of this investigation, although our objective our objective is to be thorough.
That potential financial impact of this attack has been contemplated in the company's full year 2020 guidance.
Security as a priority at EMCOR and we appreciate the patients of our employees our customers and ours vendors as we have worked through this process.
I would like to thank everyone on the EMCORE team and also our partners who have quickly stepped up and after the call to action.
Our team has performed an extraordinary manner in this attack, we remain effective and efficient in the field and our back office operations continued to support the team.
Moving forward, we will continue to provide for our customers. We remain focused on delivering excellent excellent service. They have come to expect from us and with that I will take your questions Laura.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad again, that's driving the number one I mean telephone keypad. If you do with J. movies suffer Nicky Please press the pound cool.
So just a moment compile the Kyrenia Watson.
Your first question comes from the line of blank Tillman from D.A. Davidson. Your line is now line.
Good morning, Thanks, Good morning, congratulations great year.
Thank you.
And maybe starting on industrial services, yet it really solid spring turnaround and 19 and I'm just curious if it's too early to call. Whether you think this year is going to be better drop those big 2019 contributions you soften the segment I think you said it right. When you started it it's too early to call quite a bit of midst of a good spring turnarounds.
Season.
We'll see how it ends up here in love pretty good visibility that at the end of the and our first quarter call that some of that might leak into second quarter. Mark what are you, saying, yes, I think Brian. We're we're obviously endeavoring to do whatever we can for our customers.
And we have a lot of labor mobilized as Tony said, it's a little little early right now to the call I guess when we got cut a preview of February results, we'll we'll we'll know a little bit more obviously.
Okay. Okay fair enough and then building services lot stronger growth and 19 than we'd expected that gas but.
Should we be thinking that that still has kind of the mid or high single digit organic growth business in 2020.
For the new norm changed.
I think I think you're thinking about at the right way the mid single digits.
Just like some of our.
Construction business would have small project capability that can accelerate in a given time period and of course, we brought on some significant multi site maintenance contracts in 28.
19 in that will be dependent on what kind of project work comes off of those contracts. So.
They're not quarter to quarter businesses, but if I looked at the end of the air It. It was from in the middle of mid single digits, I think would be satisfied.
Okay. Thanks for that and then just because it was called out in the presentation, but these large data infrastructure projects. I guess two part question is that included in debt in industrial commercial our Peos and then given the complexity. These I just kind of curious the margin profile over the course that project and a crew.
It is already in line to your construction segments.
I think I think the way to think about them is there would be in commercial for the most part as far as the RPL question, they burn fairly fast.
For the first significant projects I.
I think the margins very much depend on contract structure type of work, we're doing whether we're buying the materials are not or whether the customers paying for acceleration.
I would say net net that it's really good business for EMCOR, because we can deliver it we have very strong expertise unit and we deliver great value for our customers when we do that work.
Okay. Thank you that's less this quarter.
Thank you. So you have your next question coming from Bryan Adams liner from Thompson Davis. Your line is now morning, Adam. Good morning, guys are you Hey, Tony I was surprised it yet.
Good fall turnaround season in the spring is going well, what's what's your high level view of refinery right now.
Hi level view very sophisticated customers.
Consolidating platforms and of course pretty well positioned in it.
US some vendor flux.
Demanding as Hal and you better be able to execute Marshall the right resources at the right time.
So you're gaining share.
I don't know I think I think it's I think you got to be real careful Adam a week, we've talked about this in the past I think it's how your customers lined up in their turnaround seasons, and how you are performing it whether you've been able to bring additional services into those turnarounds that you have.
What's the nature of the turnaround once you once you've got involved in it we have some good competitors. There. So I'm always hesitant to talk about share I think any labor based service business, whether it be our construction business or our industrial services business, which is more time material, we think about at more of our we capture.
And the opportunities we should be in serving our customers and our we discreetly capturing the best opportunities in that opportunity to prefer.
Use our labor and tight labor market, we don't folks will lot on share.
Okay, and then can you walk us around the country, just kind of what you're seeing demand.
Bidding lies sure.
I think.
Generally demand is fairly strong I think on the north east.
It continues to be sophisticated projects and smaller projects based on energy retrofit and building upgrade.
You are up in the northeast you're looking at medical projects you to look at Ed.
Some power projects you're looking at.
Multi site use youre looking at.
Hospital rebuilds separate from medical production type facilities.
Not a whole lot of datacenter business in the in the northeast because of the price of power right I mean.
I think as you move down and you get to the mid New York, New York Metro area will carve that out as a market specifically.
EMCORE.
At least for New York City proper has never been a high rise residential business you go across the river, we do more of that work there.
I think some of the big marquee projects are now into tenant fit off stage, which fits our skill set very large.
There's lots of large infrastructure brought work coming there is some underway Laguardia airport.
We play we're planning a little bit there as you go to Kennedy, we may or May not play a little larger there.
But there is some infrastructure work going on but you know with the nature of contracting.
With the FDA you need to be very careful now what contracts you take a look contracts you don't take.
You go down at the mid Atlantic very strong market across the board.
It's a big datacenter market, it's as you expand that definition of mid Atlantic It becomes a bigger healthcare market.
Also a strong commercial market and what's what's coming on with potential Amazon headquarters in the DC area, it's going to be strong.
And that datacenter market is extended beyond the metro DC area down further into Virginia.
And.
We're well positioned at all those places as you get down South again, it's a fairly strong market theres been a lot of movement in manufacturing plants, that's something our industrial operations up not the downstream oil gas, but the ones in our construction businesses serve pretty well.
We're seeing pretty good growth of course, that's where we made the BK acquisition, which we're very excited there market leader down in the southeast to do very sophisticated work across Datacenters healthcare and manufacturing slash industrial and had a terrific people by the way.
As you go down into the Florida market.
We're very well positioned for all the work that will happen down with the water authorities in South Florida.
The market overall, Florida is fairly strong, especially for an energy.
Upgrade energy efficiency.
Commercial service type work you get to Texas.
We just talked about the turnaround business and oil and gas business units of consolidating customer base that presents its challenges and so you have to be a more sophisticated contractor to serve them.
We're in the middle of two decency that remember we were fairly weak a couple of years ago, even absent Harvey.
You go down in the Metro Houston area.
Signs of life of return medical work is back out we made an acquisition up in college station. The so more of the rural markets and again entrance into San Antonio. So we're bullish on Texas, we'd like to have more to do their Dallas, Although our morally Moss acquisition from a couple of years ago as expose us to the Dallas market and may be.
Given this entrance into what we think is going to be a fairly strong datacenter market.
Right now we're not.
Major player like we are in other parts of the country we are participating.
As as you go across there and you look at Arizona.
The southwest for Us the Arizona market is fairly strong.
Very sophisticated owners it has a texas start as healthcare sector in a commercial sector. All that are relatively strong and we participate well there on the mechanical side as you go to California, California has its own dynamics.
We expect pretty good in southern California, Orange County, and down we expect pretty good performance the la markets busy up from a cross section of again.
Hi Tech manufacturing medical institutional and infrastructure Northern California.
It has its own issues and.
The San Francisco area, but the general Bay area is pretty strong.
And you go to the Pacific Northwest were Big we're big participants of the datacenter market and also have a pretty strong presence and electrical in general with a terrific company led by a superstar up there in the Pacific Northwest.
You go across the Midwest and come across and the Rocky Mountain region. The Denver market continued strong.
You know there's opportunity there for us we continue to.
Refocus our companies, there and expect them to get better and better and as you go to the upper Midwest one of our we have a terrific subsidiary in the Midwest that does great fruit process work and is really one of the most capable fire protection contractors in the country and another one we have an ally, Ohio on the fire protection side, that's very good too.
But were strong in the Midwest, which is probably maybe not a bellwether for the whole with west. We just happen to have someone that can travel do great work and remember the food work is one of the few EGPC works, we do Ohio continues to be strong.
At least for us in parts of Ohio, and Pennsylvania as you move across has areas are shred. So I would say net net our folks are winning share.
There there are bidding to write projects and we still see good opportunities in almost all markets nationwide and in some of that might just be our position right and the capability that we built.
With 1% to 2% growth way, we think about its a big market. It has growth labor has been fairly tight we have great labor, we should still be able to execute very well.
Okay awesome. Thanks, congrats on the and the great year.
Thank you.
Thank you we have your next question coming from the line of Noel Gallagher from Stifel. Your line is now lives.
Morning Noel.
Good morning.
I know you talked a bit about growth expectations generally, but I was hoping you could lay out.
Specifically, how you're thinking about growth across the four divisions.
And your 2020 guidance and also how you're thinking about margins.
Yes, I mean smart to kick in here, it's really hard for us sitting here in first quarter to think about it by division.
So the way, we think about it especially in the two construction segments every decision that comes to our folks as a binary decision.
Last year, we want a lot of those binary decisions that we needed to win.
We won I should say needed the way that we wanted to which is a better way, saying it.
And so.
You never know, how thats going to happen or not happen last year, we were on the plus side. So we don't think about it that way we try to think about it the overall business and then as we re forecast the year, we get more clarity.
And al it's been how we've been doing it for a long time, we really don't drive our folks by growth, we think about conversion and we think about using that precious resource we have a labor across each of those divisions and really not yet.
Crazy and overrun your capabilities or don't stretched to take a job that maybe doesn't have the characteristics of another one down the road Mark maybe you could.
And all the only thing I would add to tell in his commentary as I think clearly when you look look at the double digit revenue growth, we had across all of our reporting segments other than the UK in 2019, I think the logical places where I believe we could do better than than the one to two or 1% to 3% that Tony had referenced earlier would be.
Both in our industrial and argue as building services segment with regards to our construction operations, both electrical and mechanical clearly the they're the largest.
And the EMCORE family and project timing as Tony just referenced is somewhat beyond our control.
We're optimistic that we're going to see growth in both of those segments.
Obviously, where we did acquisitions, we'll see growth irrespective of that but on an organic basis.
At this point in you know, it's a little too little too early to call definitively.
Because you could certainly see substantial project movement that can certainly impact topline for 2020, Bob positively impact 2021. So yes, we're just not quite there yet what visibility yes, that's how we've been doing it for years add it served us well.
Okay.
Any thoughts on on margins and I significant and I was six during the UK Im sorry about that high fives as five platform. So.
My apologies, but but yes, I know that I'll go back to go to Adam's question.
Got on the us the UK market.
For US is okay. We've got really good positions in the UK and they've done a great job. So out of the one part I will talk about share UK business continues to take share in a market because of stability excellence in delivery of technical service.
No well with regards with regards to margins ill just chime in when you look at our 2019 full year performance.
All of our reporting segments other than industrial.
Performed greater than our five year or 10 year operating income margin performance history.
So clearly that doesn't make a satisfied we're looking for incremental improvements, but they would be incremental improvements from where we are and we could signed a piece of paper today to say that were performing at equivalent levels. The or we just finished nuts I'll speak for myself not for my colleagues sitting with me, but I think we would all the habit design that piece.
Dave are absolutely Mark I mean.
We said this I think last year, either in the third quarter call or the call to launch here. We're much more focused on margin dollars right now, especially in our construction segments.
Then we are margin percentages I should go together, but in nature of contracts could skew that by 20 or 30 basis points. The other thing that timing can skew it on large infrastructure projects, where we tend to be conservative as we should be.
We do really complicated work over a long period of time. So all in at food processing work has a lot of the same characteristics. So it all we focus on margin at this level at 5% with great cash flow generation and good growth I think I think what mark implicit in this conversation is.
The adult turned on an opportunity to grow dollars right now at ill did worried about whether the margins stay the same or not.
That makes sense.
Last question could you just comment on what you're seeing in terms of.
On the M&A pipeline opportunities in the market.
Have you seen any sort of.
Multiple compression.
In terms of some of the targets that you're looking at given that we are later in the cycle. You know, we really have never especially the deals we've been doing over the last couple of years.
We're not competing against.
The crazies in private equity that are going to redefine the world.
We're more focused on executing in businesses that we know.
And the reality is.
You know we're buying from people that are selling their life's work.
And they want to still work they want to still build their company.
They want a long term home for their life's work I got a great note.
From we're really terrific person, we bought a business from and we're coming up on your for almost.
And it's been a terrific terrific business and.
We knew the gentleman for a couple of your and into all of us.
We were the home for his business. He thought we made a fair deal with them.
The state and ran it for us for four years and we'd have some running for 10 or 15.
And you know nothing was better than when he was able to say that no to me.
Said I did everything I told you that I would do.
And is important or more importantly, you told me.
You did everything you told me you were going to do.
And that business on every metric as Overperform, where we thought it was going to that's the kind of deals were looking forward EMCORE doesn't say, we don't get ourselves involved and processes.
We are just at a small process a couple of weeks ago.
Relatively small company.
We bid you know.
Lets say a multiple that were made sense for us, but it wasnt on the non aggressive side.
And we got said good luck you know your two turns off so we're going to keep Brian that out the way we are making fair deals I, we're not known as bargain hunters, that's not who we are.
We try to make a fair deal with someone that wants to be with us for the long term.
Are we can help grow the business together and we can continue to provide great careers for great companies.
Thanks, so much.
Thank you we have your next question coming from the line of sight.
From Keybanc capital markets. Your line is now.
Morning.
Good morning.
Doing great doing great.
Im going to ask one since Brian Lantz waiting for us on the other line there.
He can wait.
Yes.
And the industrial services business I'm, just curious about how we should be thinking about the mix of work. There just what's looking stronger maybe relative to 19 between the field and shop. We did you guys did add kind of.
New service line, there just any kind of comments on business mix and margin progression and industrial services I think part of the margin progression will come from our ability to get more absorption.
In the.
Second and third quarter Thats always critical we have a certain number of people that work with us over extended period of time, the mix will still skew to the filled.
That's a bigger part of the business, but clearly the incremental dollars, we hope to drive through our our shops is worth a lot more to us.
And then they tend to have some correlation with each other.
But you know there's no specific mix we're looking at.
But it's probably going to be similar maybe a little more favorable to the shops.
Well, maybe a bigger part in 2019 than it is in 20.
Hey, 2020 than 29, Jamie Yes, Sean.
Remaining performance obligations in our industrial services segment, which is all shop.
Related.
Is up over 100 million and at the end of 2018, it was roughly 87 million so.
As long as were successful in and pushing that all through through the through our our facilities and successfully get them out the door I.
I would like to think that we're going to see incremental improvement there, but as Tony said once again this firm up skewing the percentages of that segments revenues, that's going to be hard for.
For that activity.
The.
In at the expense of the field services, because it's so much larger.
Excellent got it very helpful learned a lot on this call today. Thanks for the time will tell bright.
Well.
Thank you.
Your next question will come from the line of gentleman deals from Sidoti and company. Your line is now line.
Hi, guys. Good morning morning, Joe I was wondering if you could talk about the price cost spread in 2019 given.
Dynamics of wage increases, but also the leverage that you have did that change at all compared to past years. No. You look at our gross margins are relatively consistent the mix is relatively consistent and I think thats, where you see it one of the thing Joe we always pay attention to though is operating in.
Income margins, a little more than we do gross margins because our mix of work can skew that 10 2030 basis points at the side. We are now size, we used to be used to skew. It even more size. We are now at 10 2030 basis points can skew based on mix, we focused much more on operating look so far.
Think about the dynamics of our there are no wage surprises in our business right. We have three to five year contracts with with our Union and.
Our non union. We also have pretty good idea what labour visibility is that we're bidding into a project. So then you get down to crew mix on the Union side, we have very strong definition around crew mix, because we know what we bid and we know what we can do for the contract and if we got exceptions to that crew mix, we know that bidding the job.
On the non Union side again, we have a pretty good idea with the mix of folks were going to use on a particular thing so.
What I'm really saying is most of our price cost.
Differential would pass on to the customer can you have a short term dislocation on materials, which is not going on right. Now could you have that you could bid prices itself out within within eight to 10 weeks.
Alright and.
Relative to past years, just given sort of the economy slowing a bit I'm just wondering I mean, your arc, our peos organically seem down a little bit.
How has your project intake.
Been trending at this point in time in the year relative to past years, we just.
Finished a series of about 60 calls with our subsidiary organizations.
I would say most people look at.
It takes a little different than that means the one loss and that can be skewed in short term, we look more at jobs available to bid that we really want to bid.
And that is as strong as it was last year and last year was very strong.
Okay, and so in terms of the guidance, which I think sort of it looks like its calling for maybe.
Low single digit growth.
And you saw a little bit higher growth on that last year.
Is that just a conservative aspect or is there any visibility different than there was a year ago could you just frame that relative to the guidance. We give guidance the same way almost every year for 12 years right we start out.
People, saying, we're conservative we tried to say this is what we think we know today, we're sitting here in the first quarter, we've got a whole year in front of us.
We have to go.
Well, the bulk and finish a lot of work in the year. These numbers.
These numbers and it's a project based business and I know people get tired me, saying Theres two things that I observed over a long period of time.
Every decision our customers make is binary and our project business, where they're going to.
Get the project or not they usually don't give us pieces of it is not like manufacturer. That's got a piece of that market, they're going to get.
Then absence of badness is a big thing in our business and we started out this year coming off about really terrific to your three year run on absence of badness, we seeing no reason that part won't continue but the binary decisions always make us a little hesitant because someone else is making that decision versus us.
Okay, and then looking at some industry reports it looks like sort of overall and this is very broad solid thats why I want to ask the question.
Nonresidential construction.
Decline construction starts declined.
Very modestly last year, and then even in 2018, and they're calling for a little bit bigger declines in 2020.
Could you help us understand what you're seeing and thats. It thats similar to what your business and what you're seeing amongst your customers.
Or is it a little different because that's just such a broad report some of the report yet I think what you're saying is right. It's a broad report lots in there lot of residential high rise would be in there.
Expansive market lot of things that we wouldn't even participate in for the most part we tend to skew to the higher end of that market and we see that really good project opportunities in front of us sitting here today in first quarter 2020.
Okay, and then last question sort a two part BK how did that perform in the two months or I guess in the fourth quarter. If you know whats September was.
Our October I mean, how did that perform in the fourth quarter relative to that $400 million revenue annually that you put out in the press release and then what is your expectation of DNA for 2020.
We don't breakout specific subsidiary performance.
400 million is sort of what it's done over a period of time like any other one of our companies that do large projects.
They can have a small eight to 12 week wallet action and then pick up pretty quickly.
What we do know it's had is disclosed in the.
Okay, we had pretty good performance coming out of the gates.
This is a company that knows how to execute some of the toughest most sophisticated work they have and they got they would be they would skew into the top end of Emcores contractors.
Median lead to start as what we think it can do and how we think they'll execute mark yes. So the only thing I would add is.
The Tupper Tony's commentary clearly with the acquisition occurring in November.
We have to we have to get through a lot of acquired backlog amortization.
So.
Topline as topline, but incremental profit contribution.
At least in the initial months is going to be somewhat diminished by that amortization expense, which is why when we went out with the press release and provided commentary with regards to its contribution for 2020.
Yes, we weren't right we weren't we weren't as both of our weren't that bullish as because of what the drag is that acquired backlog and that's obviously pursuant to the accounting regulations and it just anytime you buy a company of that size right into it comes with that it comes with a.
Large project work that has the same ebbs and flows of our large project work and we buy side of that size. We're really looking for contribution to be significant sort of eight to 15 months out from that this being.
Pragmatic because of the things Mark talked about and also the ebbs and flows of their own business.
That's why when we look at something like that we look at it over multiple years.
And not just off of one year.
All right understandable could also the DNA just given the size of that acquisition just wondering what your expectation is for 2020 Bill with regard to look with regards to the the amortization expense.
Related to the acquired intangibles.
For.
2020, and its this this is disclosed in the footnotes the 10-K.
Full year.
Intangible amortization is roughly $56.7 million.
And then Neal I suspect from this the pure depreciation expense for the company, it's not going to look significantly different than it did for full year 2019, if anything it will be slightly up and if it's slightly up you're talking single percentage points.
And that this was a function of plus changing our capital for some of these newer businesses, we acquired capital assets.
Okay. Thanks have a great alright. Thanks.
Thank you that will be for your last question for Santander. Please continue.
Okay.
We.
Thank you all for following US a 19, we look forward to talk in the on 20.
And thanks for all your support and interest in EMCORE.
And I'll finish by saying, we're blessed to have a great team here.
And I know this team that I've.
Over on the table here with US today, we are very thankful for the people in the field and that we operate.
Great for our customers and we do it in a safe efficient manner have a great deal.
Thank you everyone for participating this concludes today's conference you may now disconnect.
Paul.
And.
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