Earnings Call Transcript - EME Q4 2021

Operator, Operator

Good morning. My name is Jerome, and I will be your conference operator today. I would like to welcome everyone to the EMCOR Group Fourth Quarter and Full Year 2021 Earnings Call. Mr. Brad Newman with FTI Consulting, you may begin.

Brad Newman, FTI Consulting

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.

Kevin Matz, Executive Vice President of Shared Services

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.

Anthony Guzzi, Chairman, President and Chief Executive Officer

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 zero 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 benefited from those factors, including 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 Vice President and Chief Financial Officer

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 by 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 has 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 pertain 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 the 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 a 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 improvement. 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 were 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.

Anthony Guzzi, Chairman, President and Chief Executive Officer

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 two 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 three critical trades: the installation of complex electrical and mechanical systems, certainly. But in addition, we have large-scale nationwide fire protection project capability. Over the last few years, we have strengthened our 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 of 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 refer to Page 13 to discuss the growth and resilient market sectors we've talked about in the past. Although we've reviewed this page before, I felt it was important to revisit it considering the various macro factors influencing our business today. These sectors continue to drive our strong organic growth and support our business during these challenging times. Macro trends play a significant role in this, creating a demand for EMCOR. Some of these trends, while generally negative from a global perspective, are favorable for EMCOR. Key trends include digitization and cybersecurity, e-commerce, supply chain repositioning driven by geopolitical events and supply uncertainties, as well as enhanced life safety requirements and healthcare flexibility brought about by COVID. The energy transition and volatility in energy costs also present opportunities for EMCOR to serve our customers. Now, let’s break down each of these aspects. Starting with data centers, there’s an immense demand for hyperscale data centers to facilitate digitization efforts like e-commerce and AI, alongside protecting against cybersecurity threats as more organizations shift to cloud services supported by major companies such as Google, Amazon, and Microsoft, which are establishing their own data centers leading to centralization. We have the capability to support this demand with our electrical, mechanical, and fire protection services across numerous regions, particularly in growth markets. In the construction arena, particularly regarding electrical and mechanical work, our focus on fire protection remains unparalleled, especially in e-commerce and large-scale warehousing. We're continuing to enhance both cold and regular e-commerce supply chains in terms of fire protection. Additionally, we are expanding our presence in the electrical sector for warehouses, as larger facilities like those operated by Amazon are increasingly incorporating charging stations for delivery trucks, which necessitate complex electrical projects involving substations and advanced switchgear. Industrial manufacturing has seen one of the most substantial shifts in our business model. As noted by one of our team members earlier today, our electrical and mechanical work was previously developer-centered, focused on commercial office buildings, but that is no longer our primary focus. We are deeply involved in electrical and industrial manufacturing, aiding in the semiconductor sector's expansion in critical markets both mechanically and electrically. We're contributing to the pharmaceutical industry's recovery and supporting the development of battery plants in the U.S., as well as facilitating electrification in line with the energy transition. Our support for existing process industry clients spans various sectors, including refining, petrochemicals, paper, cement, and more. In healthcare, we've consistently demonstrated our capabilities over the years, and our customers have recognized our efforts, particularly throughout COVID. We were able to quickly assist in making facilities more adaptable, executing this with precision and cost-effectiveness. The current trend in healthcare is toward flexible systems and capacity expansion, as many municipalities acknowledge they've reduced healthcare capacity too drastically. Regarding water and wastewater management, we are successfully operating in Florida, which is currently the best market in the country for such services, especially concerning Everglades restoration and the burgeoning population in South Florida. Our Poole & Kent team, led by Pat Carr, is exceptional in this field. Mechanical services are pervasive, with our operations focused on energy efficiency and indoor air quality upgrades. Our team was well-prepared for the challenges posed by COVID and has been actively engaged in energy efficiency upgrades for years. Almost every retrofit project includes energy savings, enhancing buildings' efficiency, sustainability, and productivity. Recently, we've shifted our focus from removing outside air from buildings to reintroducing it while still addressing energy efficiency, and no other company matches our capability in this regard. Additionally, we are involved in various renewable projects, particularly in the West, focused on small-scale solar and onsite generation of other fuel sources, providing a comprehensive offering. Indoor air quality has been a focal point, and our fire protection services remain top-notch; we lead the industry with some of the best operators who help set industry standards. I'm grateful every day to have them on our team. On Page 14, I will discuss EMCOR's trends in capital allocation. Currently, there isn't a significant trend to highlight. We examine this over 5- and 6-year periods. To me, and I believe Mark agrees, the most relevant data is shown on the far right, representing our 6-year average. A change of plus or minus 5% is what we view as optimal capital allocation for our business within current market conditions. So what are our capital allocation goals? We are keen on funding organic growth, and we've seen substantial growth in our Construction and mechanical services sectors. Notably, we've maintained organic growth even as our Industrial Services segment has contracted over the past couple of years, which underscores our ability to manage the projects mentioned earlier. We prioritize internal capital expenditures, aiming to enhance productivity or facilitate growth. For instance, a strategically located fire protection fabrication shop in growing markets can provide us with cost advantages and improve service to our customers. Additionally, acquisitions are a key priority for us. Over the last five years, we've focused on core operations, consistently enhancing our capabilities with talented individuals and successful companies. Moreover, we believe in returning cash to our shareholders via share repurchases and dividends. Ideally, we allocate 55% to 70% of our capital for growth and productivity initiatives, whether through organic growth or acquisitions, returning the remainder to shareholders. This strategy has proven successful for EMCOR. Now, moving on to Page 15 and 16, as we formulate our initial guidance, we often encounter various uncertainties in the external environment, particularly over the last couple of years. I had hoped for less uncertainty in 2022. Given these challenges, it is crucial for us to carefully consider both the lower and upper limits of our guidance range, approaching our business execution conservatively amidst these uncertainties. Our initial guidance estimates revenues of $10.4 billion to $10.7 billion, and earnings per diluted share ranging from $7.15 to $7.85. We anticipate growth in the nonresidential market in the low to mid-single digits, a return to more normalized demand from our refining and petrochemical clients, and continued activity in small projects discussed before. Our guidance also takes into account ongoing disruptions from macroeconomic factors such as inflation, supply chain issues, and COVID impacts. As before, our position within this range will hinge on various factors, some of which we can influence while others are beyond our control. Let's first address what we can manage. Our long-standing track record shows we have effectively controlled costs. However, supply chain disruptions and COVID remain unpredictable variables. The costs associated with COVID testing could also impact us since we self-insure outside our union plans, and the President's executive order on home testing applies broadly with minimal qualifications for obtaining supplies. I expect continuing challenges from fuel costs, as demonstrated by the current situation in Ukraine, and we have accounted for most of these challenges in our guidance. We will persist in winning contracts while maintaining discipline in estimating and pricing. I am pleased with the current state of our backlog and its pricing. We will continue emphasizing our areas of expertise as discussed earlier, and we are committed to safety throughout our organization. However, there remain several factors outside our control. To address a pertinent question, we predict supply chain conditions will not significantly improve as the year unfolds. While some areas may see enhancements, others may decline. Regarding possible COVID resurgences, it's uncertain. Regardless, we will prioritize our employees' safety by adhering to recommended protocols and striving for productivity. As for the impact of uncertainty on customer decision-making, I don't foresee a slowdown in significant projects, particularly those related to global supply chain adjustments, reshoring, healthcare, food processing, semiconductors, life safety, or pharmaceuticals. In the primary markets we operate in, I expect customer decisions to remain stable, although there may be a need for more upfront planning in these uncertain supply chains. This is beneficial for us, as we have skilled personnel experienced in thorough planning and contingency strategies. We've honed these contingency planning skills significantly over the past few years amid uncertainty. In terms of inflation, while I anticipate it may stabilize in the coming year, it is likely to trend upwards. The energy markets are experiencing unprecedented volatility. As we venture into 2022, we will continue exercising disciplined capital allocation regarding our organic investments, acquisitions, and cash returns to our shareholders, all vital uses of our capital. I appreciate everyone’s ongoing support. I would like to extend my gratitude to our employees and leaders. Thank you for your interest in EMCOR, and we are now ready to take your questions.

Operator, Operator

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 fortified 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, Chairman, President and Chief Executive Officer

Look, Sean, I think contingency is a macro-driven view. If we perform better with those macro elements, we will improve in the range, which I've discussed. My concern, like any CEO's right now, is the supply chain and its unpredictability and its impact on labor productivity. Fuel and energy costs are significant wildcards. I believed they were a wildcard entering last year, and recent developments have not clarified the energy situation for companies operating large fleets. We will do our best to pass those costs onto our customers, but keep in mind we always do this in arrears. We can't predict fuel prices and pass them on beforehand, which mainly affects our time and material business. Moreover, COVID negatively impacted our productivity in the fourth quarter. Do I think that's improving? Yes. Do I know that it will continue to improve this year? Not necessarily. We thought we had momentum last July, but then we faced Delta, followed by Omicron. I'm not an expert on epidemiology, but I understand numbers. The future is uncertain. Considering these potential factors, it’s possible we will perform well, but perhaps not as well as we could have. We feel optimistic about our RPOs and the demand in our end markets. However, execution is critical in this environment of uncertain labor productivity due to COVID and unpredictable material availability from the supply chain. Mark?

Mark Pompa, Executive Vice President and Chief Financial Officer

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 timelines 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, Chairman, President and Chief Executive Officer

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 to, 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... 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, Chairman, President and Chief Executive Officer

We share your concern, Sean, that clients are currently focused on securing capacity with top-tier contractors, indicating a shift towards higher quality. If you look back at the page discussing resilient markets, we've experienced growth in 9 of the past 12 quarters in our RPOs, which isn't common for us. This trend can be unpredictable; it can fluctuate due to large projects. However, I believe there are significant opportunities out there that we are actively engaged with, and we will see when they are awarded. While the timing may vary, I am optimistic about the potential projects in our pipeline. We are collaborating as part of a team on these projects, and it's just a matter of when they will happen. We are one of two teams competing for some of these opportunities, and our chances look promising. Additionally, I examine certain aspects of our business to gauge overall momentum. Our small project work is currently very robust, indicating that clients are not only investing at the high end but also making necessary improvements on maintaining their facilities, enhancing energy efficiency, and improving indoor air quality. We are also seeing strong performance in our fire protection business, which is involved across various sectors, reflecting a solid national outlook on more complex projects. One factor that may influence decision-making is that many of these decisions still need to be made, as most of our clients are well-capitalized. While there are times we may have overestimated their financial strength, that is rare. They need to complete their projects. There is a significant shift occurring to support new investments in energy transition, alongside a restructuring of traditional supply chains. This shift is reminiscent of what I saw earlier in my career, where there was a move from high-cost states to lower-cost ones and even to Mexico and Asia. Now, we are witnessing a reverse trend, still moving towards lower-cost states. We made proactive investments in this area in the mid-2000s and in the last few years, positioning ourselves ahead of the curve.

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 type of range?

Anthony Guzzi, Chairman, President and Chief Executive Officer

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 Vice President and Chief Financial Officer

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. Yes, Noelle, this is quite grounding. When you analyze the full year 2021 by segment, both Electrical and Mechanical Construction are performing above their 3- and 5-year averages. However, the performance in the last half of 2021 shows a different trend, as Electrical Construction's performance during that period was actually below those averages. As we planned for 2022, we factored in margin performance similar to what we've seen over the last three years. This implies that Electrical Construction should be around 8.25%, potentially slightly higher, while Mechanical Construction could be in the range of 7.75% to 8%. Consequently, the blended rate for total Construction is either slightly below 8% or up to 8.2%. This still represents a solid performance. We often become accustomed to recent trends and regard them as the new reality. While the EMCOR team would like that to be the case, we don’t control the market. We are currently in a favorable position in some areas, as Tony elaborated, but this situation isn't likely to last indefinitely. Looking ahead to 2022, the demand and opportunities framework doesn't seem to indicate any softness. When you look at our U.S. Building Services, the 2021 performance was slightly below the 3-year or 5-year average for the reasons that we've already discussed. Clearly, supply chain difficulties have been the most impactful there. Since there's a significant nonunion labor component to that segment, our ability to shift resources is good. However, if we have labor on-site and materials and equipment for installation are not available because they're being procured by someone other than the EMCOR subsidiary, we're still responsible for payment for that labor, which is not very productive. We continue to focus on project management, which is a center of excellence for EMCOR and has been for a significant part of my history with the company. I hope that performance will stabilize around the 5% range. Additionally, as Tony indicated, the Industrial segment has faced instability over the past 3 or 4 years due to various external factors we've discussed previously. Their 3-year average is below 2%, which would be disappointing if that is where profitability ended up for that segment in 2022. As we mentioned in the last call, while I hope to see a return to the mid-single digits, we need to make gradual progress first.

Anthony Guzzi, Chairman, President and Chief Executive Officer

Kind of get 4% first. Mark Pompa: 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 timelines, 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.

Adam Thalhimer, Analyst

Nice quarter.

Anthony Guzzi, Chairman, President and Chief Executive Officer

Thanks, Adam.

Mark Pompa, Executive Vice President and Chief Financial Officer

Thanks, Adam.

Adam Thalhimer, Analyst

Tony, what are you hearing from industrial customers? I'm curious about their feedback regarding project activity this year.

Anthony Guzzi, Chairman, President and Chief Executive Officer

Refining and petrochemical? Okay. Because we have more industrial customers than just EIS. 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

I'm curious about the supply chain issues and inflation you experienced in the latter half of 2021. What strategies did you implement when signing new contracts? Additionally, how do you assess your margins in the backlog and your level of protection from these challenges this year?

Anthony Guzzi, Chairman, President and Chief Executive Officer

I believe we have taken significant steps to protect our workforce. Here's a summary of the changes we've implemented. These adjustments started in the first quarter of last year, or perhaps as early as the fourth quarter of 2020, when we anticipated some challenges. We have shortened the duration for which we keep prices open to 7 to 20 days, down from the previous 30 to 60 days. This means our commitment to honoring quotes, especially for smaller projects, has been adjusted. In doing so, we generally ensure that we are tightly aligned with job commitments from our suppliers regarding payments. For larger projects, we have two main contracting methods: fixed price or Guaranteed Maximum Price (GMP), which behaves like a fixed price but includes provisions for material price increases. This trend is growing for larger projects as we cannot guarantee material costs. Clients understand our reputation for effectively procuring materials, yet there are circumstances we account for that were not previously common. We are proactive about lead times, allowing our teams to negotiate effectively with clients regarding essential materials. To summarize my thoughts on our backlog, I feel quite confident. We have done everything within our power to safeguard our position. I believe our pricing is appropriate, and we've achieved the best possible terms given the current environment. Our clients and general contractors have been reasonable, and many prefer us for our proven ability to deliver quality results. We possess strong technical ability, effective project execution, and the capacity to secure necessary labor. Moreover, our financial stability is an asset, making us a reliable partner for large projects. The most significant uncertainties we face this year stem from external factors beyond our control. I cannot predict the future course of COVID-19 or how supply chain issues will develop. It’s not just about pricing in the supply chain; availability is a bigger concern. Promises regarding supply can fall short. For large projects, we can adjust sequencing and workforce deployment, but with smaller or quicker jobs, the timely delivery of critical equipment is crucial. Delays can severely disrupt operations during retrofits, where minimizing disruption is essential for facility functionality. Our detailed planning accounts for this, ensuring labor is available for overtime and weekends. However, even a brief delay can have significant cost implications across multiple projects. This has been the primary challenge we've faced in the mechanical service sector over the past six months. We maintain open communication with distributors and equipment suppliers, who also face their own disruptions due to COVID-19 and material sourcing issues, leading to production shortfalls.

Brent Thielman, Analyst

Just one last question from me. Tony, I was thinking about your prepared remarks and especially some of the investments you've made in the past that seem to be helping you navigate the current market challenges like inflation. Can you discuss the state of the balance sheet and perhaps the less attractive M&A opportunities available right now? What are some of the programs or initiatives you are investing in today that could be beneficial in the future? Is there anything worth sharing about that?

Anthony Guzzi, Chairman, President and Chief Executive Officer

Yes, we are actively expanding our fire protection prefabrication capabilities. Currently, we have four strategically located facilities, and we plan to increase that number to six within the next twelve months. We are also enhancing our prefabrication efforts in both mechanical and electrical operations, with around twelve significant shops for mechanical work and six for electrical. We're increasing our operational scale within these shops to become more modular for larger projects. Training remains a priority for us, viewed as a crucial investment in our company culture, particularly coming out of a two-year hiatus due to COVID. We will resume our executive training in March, focusing on our values and leadership development. Additionally, we are committed to investing in Building Information Modeling (BIM), having assigned dedicated resources to this initiative under Joe Burns, one of our key segment leaders. Our relationship with Autodesk has improved, and we are eager to innovate in our mechanical service training and enhance virtual training for our technicians. We are also increasing funding for our training center in Arizona. On the project management side, we are making strategic investments, all of which contribute to our competitive differentiation in the market. Acquisitions play a significant role in this process, allowing us to integrate new tools and learn from advanced practices in the industry. For instance, when we acquired B&K in the Southeast, we gained insights into their prefabrication processes, particularly in shop automation, which we have since applied to our mechanical business. Overall, acquisitions not only broaden our geographic and technical reach but also facilitate valuable learning opportunities. 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, Operator

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