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spk00: Good morning. My name is Jerome, and I will be your conference operator today. At this time, I would like to welcome everyone to the MCOR Group Third Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star to the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Mr. Brad Newman with FDI Consulting, you may begin.
spk07: Thank you, Jerome, and good morning, everyone. Welcome to the MCOR Group conference call. We are here today to discuss the company's 2021 third quarter 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.
spk02: Thank you, Brad. Good morning, everyone, and happy Halloween. As always, thank you for your interest in MCOR, and welcome to our earnings conference call for the third quarter of 2021. For those of you who are accessing the call via the internet on our website, welcome to you as well, as you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on slide two. The presentation 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 today. They are Tony Guzzi, Chairman, President, and Chief Executive Officer, Mark Pompa, our Executive Vice President and Chief Financial Officer, and our Executive Vice President and General Counsel, Maxine Mauricio. For call participants not accessing the call via the Internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under Presentations. You can find us at mcoregroup.com. With that said, please let me turn the call over to Tony. Tony?
spk05: Good morning. Thanks, Kevin, and thanks for joining our call. My opening comments will reference pages four through six of our presentation. As we have navigated the last two years, we have learned to operate in a highly uncertain and volatile environment. And we have done it with success on almost any metric. We've had to accomplish our mission while keeping our people safe. Our company values of mission first people always have served us extremely well throughout these unprecedented times. We had an exceptional third quarter at MCOR. especially against a very difficult comparison in the prior year. As you may recall in the third quarter of last year, we were bringing about a third of our company back to full operations. We had projects poised and ready to resume or start, delayed service that needed to be completed, and buildings, campuses, and production facilities that we helped our customers reopen as they resumed operations. Further, we had yet to bring back our full complement of staff that we need to sustain and build our operations. Said simply, we had an abundance of work, had all the materials, and a lower cost base as we were still returning to full operations after the extreme cost reductions we had taken in response to the pandemic. Against that backdrop in comparison for the third quarter of 2021, we were able to post $1.85 in earnings per diluted share versus $1.76 of adjusted diluted earnings per share in the year-ago period. We grew revenues to $2.52 billion with 14.5% overall revenue growth and 12.2% organic revenue growth. We posted 5.4% operating income margins despite strong headwinds from supply chain issues and labor disruptions caused by the Delta variant. I believe this is very good performance considering the operating conditions we faced in the quarter. We grew remaining performance obligations, or RPOs, 18.7% from the year-ago period to $5.38 billion. We generated operating cash flow of $121 million despite the strong organic revenue growth. All in all, we had a very successful quarter that continues to show the strength and diversity of our business, but more importantly, the outstanding leadership provided by our teams at the subsidiary segment and corporate level. Our electrical and mechanical construction segments had excellent performance in the third quarter of 2021. Both segments posted strong operating income margins and had strong organic revenue growth. Through careful planning on our large projects and excellent supplier relationships, we mitigated a lot of the supply chain disruptions facing our operations. However, We have seen cost increases of 10% to 20% and anticipate that such increases will continue in the near future. And that is only part of the issue, as we have seen lead times increase by two to three times their normal levels. Our success in the corridor points to the continued resiliency of our teams, their ability to navigate these issues, deliver for our customers, and continue to keep our workforce productive and safe. We continue to have a robust pipeline of data center, warehousing, and healthcare projects, and we have strong bookings with our manufacturing clients in the quarter. Building services had the most difficult comparison in the quarter as the deep cost cuts taken at the height of the shutdown were most severe in this segment. We still posted decent operating income margins of 5% against the year-ago period of 6.9%. However, We were most affected in this segment by supply chain issues and diminished productivity. Although demand for our retrofit project work is very strong, we had some issues with the synchronization of our supply chain with our labor planning, resulting in reduced productivity. To mitigate these issues, it has become a common practice to have daily communications on deliveries and price changes on our quick-term project and service work. Further, this segment also bears the brunt of the dollar per gallon increase in the fuel, which gasoline and diesel year over year due to its large fleet. And this had an impact of 20 to 30 basis points on operating income margins. We can pass some of this increase on to our customers and had just repriced into our time and material rates in June. We will do so again between now and January across the majority of our building services operations. This is the second increase this year which is not our usual practice of executing, which is once a year, usually in June. Demand remains strong, and we will continue to improve our planning over the next quarter or two. Industrial services continue to operate as we expected. We improved on a year-over-year basis with respect to revenue and operating income. We had some impact with respect to the storms in the Gulf Coast, but that mainly just pushed out work to later in the year or into next year. and we did have some disruption to our shop work in Louisiana. Demand for our services continues to build. Refinery utilization is at a very high level, and we expect to execute a better fourth quarter turnaround season this year versus the year ago period. We also anticipate much improved demand as we exit the year and move into the first quarter of 2022. The UK continues to execute well for its customers with double-digit revenue growth and good operating income margins. Demand remains strong for our services, but like in the United States, we are also battling supply chain issues for our quick-term project work in the United Kingdom. We leave the quarter with a pristine balance sheet, strong fundamentals, and record RPOs. And with that, Mark, I'll turn it over to you.
spk06: Thank you, Tony, and good morning to everyone participating on today's call. For those accessing this presentation via the webcast, we are now on slide seven. Over the next several slides, I will augment Tony's opening commentary on MCOR's third quarter, as well as provide a brief update on our year-to-date results through September 30th. All financial information referenced this morning is derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier today. So let's revisit and expand our review of MCOR's third quarter performance. Consolidated revenues of $2.52 billion are up 320 million or 14.5% over quarter three 2020 and represent a new all-time quarterly revenue record for MCOR. Each of our reportable segments experienced quarter over quarter revenue growth. Excluding 50.3 million of revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by MCOR in last year's quarter, revenues for the third quarter of 2021 increased nearly 270 million or a strong 12.2% when compared to the third quarter of 2020, which was still somewhat impacted by the effects of the COVID-19 pandemic. The specifics of each reportable segment are as follows. United States electrical construction revenues of 527.9 million increased 55.9 million, or 11.8%, from 2020's third quarter, excluding acquisition revenues within this segment of 29.5 million, this segment's revenues grew organically 5.6% quarter over quarter. Increased project activity within the commercial healthcare and institutional market sectors were the primary drivers of the period over period improvement. United States mechanical construction segment revenues of $999.6 million increased $108.1 million, or 12.1%, from quarter three 2020. The results of this segment represent a new quarterly revenue record. Revenue growth during the quarter was driven by increases within the manufacturing, healthcare, and commercial market sectors. With respect to the manufacturing market sector, we are in the early phases of construction on several food processing plants, which will accelerate further as we move into 2022. From a healthcare market sector perspective, there continues to be greater demand for our services as we are engaged in a number of projects ranging from mechanical system retrofits to complete installations in both new and existing healthcare facilities. Lastly, within the commercial market sector, we continue to see strong demand for data center project work given growth in digital storage and cloud computing across the United States, and we continue to assist our e-commerce customers with the build-out of their warehouse and distribution network through both traditional mechanical as well as fire protection services. Third quarter revenues from MCOR's combined United States construction business of $1.53 billion increased $164 million, or 12%, with 9.9% of such revenue growth being organic. This combined revenue performance eclipses the quarterly revenue record established by this group during the second quarter of this year. Despite this record revenue performance, each of our construction segments have increased the remaining performance obligations both year-over-year as well as sequentially. United States building services quarterly revenues of $632.5 million increased $75.9 million, or 13.6%. Excluding acquisition revenues of $20.8 million, this segment's revenues increased 9.9% organically. Revenue gains were reported within our mobile mechanical services division due to increased project, service repair, and maintenance activities. Our commercial site-based services division, as a result of new contract awards, and our government services division given an increase in indefinite delivery indefinite quantity project volumes. MCOR's industrial services segment revenues of $232.2 million increased $60.7 million or 35.4% due to improved demand for both field and shop services as we are beginning to see some resumption of maintenance and small capital spending in the energy sector. United Kingdom building services revenues of $129.5 million increased $19.4 million or 17.6% from last year's quarter. Revenue gains for the quarter resulted from the continuation of strong project demand from this segment's maintenance customers who previously deferred such work during 2020 as the result of the COVID-19 pandemic and the related prolonged UK government lockdown measures. Additionally, this segment's revenues were positively impacted by $8 million of favorable foreign exchange rate movements within the quarter. Please turn to slide eight. Selling general and administrative expenses of $243.9 million represent 9.7% of third quarter revenues and compared to $226.8 million or 10.3% of revenues in the year-ago period. The current year's quarter includes approximately $5.3 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter increase in SG&A of $11.9 million. Consistent with my commentary during our second quarter earnings call, the prior year period benefited from substantial cost reductions resulting from or 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, MCOR's considerable revenue growth in 2021 has necessitated an increase in headcount in the current year. Additionally, Our SG&A for the current period reflects an increase in healthcare costs as the result of a normalization in the level of medical claims, as well as greater travel and entertainment expense due to a partial resumption of certain business activities by our workforce when compared to the same timeframe in 2020. 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 revenue growth. Reported operating income for the quarter of $137.4 million, or 5.4% of revenues, compares to operating income of $135.9 million, or 6.2% of revenues, in 2020's third quarter. The 80 basis point reduction in operating margin is due to reductions in gross profit margin within several of reportable segments due to a less favorable revenue mix which I will elaborate on during my individual segment commentary. Despite this reduction in quarter-over-quarter operating margin, MCOR's $137.4 million of operating income represent a new third quarter record. Specific quarterly performance by segment is as follows. Our U.S. electrical construction segment operating income of $44.1 million decreased $1.9 million from the comparable 2020 period. Reported operating margin of 8.3% represents a reduction from the 9.7% margin reported in 2020's third quarter. The decrease in both operating income and operating margin is due to a decline in gross profit within the commercial and transportation market sectors, given a change in the composition of project work performed quarter over quarter. In addition, and as disclosed in last year's third quarter, the results for the prior year period benefited from the settlement of final contract value on two projects, which favorably impacted this segment's Q3 2020 operating income and operating margin by $4.4 million and 70 basis points, respectfully. Third quarter operating income for our U.S. Mechanical Construction Services segment of $82.3 million represents a $2.3 million increase from last year's quarter, while operating margin of 8.2% represents an 80 basis point reduction from the 9% earned in 2020's third quarter. From an operating margin perspective, similar to our electrical construction segment, the reduced profitability can be attributed to a less favorable mix of work during the quarter. Most notably, this segment experienced a decrease in gross profit margin within the manufacturing market sector as the results for the period include increased revenues from certain large food processing projects for which we are acting as the construction manager and carry lower than average gross profit margins when compared to our traditional subcontractor arrangements with our customers. Further, the results for the year-ago period benefited from the favorable closeout of several manufacturing projects, which resulted in incremental operating margin contribution. To be clear, the impacts within the quarter for both our construction segments relate to discrete projects or events and should not be misconstrued as representative of our margin expectations for all ongoing project and service contracts included in remaining performance obligations, which Tony will cover in detail later this morning. Our combined U.S. construction business is reporting $126.4 million of operating income with an 8.3% operating margin. This level of operating income represents a new third quarter record for our combined construction business. I would like to add that, though below that of the prior year, the operating margins to date in 2021 for each of our electrical and mechanical construction segments exceed both their three-year and five-year average margins. Operating income for U.S. building services is 31.6 million, or 5% of revenues. This represents a reduction of $6.9 million and 190 basis points of operating margin quarter over quarter. Growth in operating income within this segment's commercial site-based and government services divisions was not enough to offset declines within its mobile, mechanical, and energy services divisions. As I commented during last quarter's call, Our mobile mechanical services division has a large number of fixed-price capital projects currently in process, which traditionally have a lower gross profit margin profile than this segment's call-out service and small project work. In addition, during the quarter, we experienced some productivity issues partially due to the delayed receipt of certain equipment and materials, which has impacted our profitability both in terms of dollars and margin. Lastly, growth in this segment's SG&A expenses due to headcount additions to support revenue growth as well as incremental amortization expense related to businesses acquired, further compressed operating income and operating margin. Our U.S. industrial services segment operating loss of $3 million represents a $5.9 million improvement from the $8.9 million loss reported in 2020's third quarter. Although an improvement, this segment continues to be impacted by difficult market conditions within the oil and gas industry. Additionally, although not as severe as in the prior year quarter, This segment experienced lost workdays due to both temporary plant and certain customer site closures resulting from named stormed activity in the Gulf Coast region during the 2021 quarter. UK Building Services operating income of $6.6 million or 5.1% of revenues represents an increase of $1.3 million and a 30 basis point improvement in operating margin quarter over quarter. Approximately $400,000 of this period over period improvement is due to positive foreign exchange movement with the remainder attributable to an increase in project activity primarily within the commercial market sector. We are now on slide nine. Additional financial items of significance for the quarter not addressed on the previous slides are as follows. Quarter three gross profit of $381.3 million is higher than the comparable quarter by 18.2 million or 5%. Gross margin of 15.1% is lower than the 16.5% and last year's third quarter due to the shifts in revenue mix in each of our U.S. electrical and mechanical construction segments, as well as their U.S. building services segment, as I just referenced during my segment operating income discussion. Diluted earnings per common share of $1.85 represents a new quarterly record for the company and compares to $1.11 per diluted share in last year's third quarter. Adjusting 2020's EPS for the negative impact on our prior year income tax rate resulting from the non-deductible portion of last year's non-cash impairment charges recorded during 2020 second quarter. Non-GAAP diluted earnings per share for the quarter ended September 30th, 2020 was $1.76. When compared to our current quarter's performance, we are reporting a 9 cent or 5.1% quarter-over-quarter earnings per share improvement. Please turn to slide 10. With my quarter commentary complete, I will touch on some high level highlights with respect to MCOR's results for the first nine months of 2021. Revenues of $7.26 billion represent an increase of $747.8 million, or 11.5%, of which 9.4% of such revenue growth was generated by organic activities. Operating income of $387.8 million, or 5.3% of revenues, represents a significant increase from reported operating income for the first nine months of 2020 and a double-digit increase from the corresponding adjusted non-GAAP operating income figure for that period. Year-to-date diluted earnings per share is $5.17 and represents an increase of approximately 14% over 2020's adjusted non-GAAP EPS for the nine-month period. Although not shown on this slide, my last comment on our year-to-date results is with respect to operating cash flow. For the first nine months of 2021, we have generated approximately $114 million of operating cash flow, which is well below 2020's record performance. As I commented last quarter, our substantial organic revenue growth has required increased working capital investment. This contrasts to 2020, where for a large part of the year, we were liquidating our balance sheet due to the revenue declines resulting from the COVID-19 pandemic. Further, it is important to note that last year's nine-month operating cash flow was favorably impacted by $82.3 million due to government stimulus measures that allowed for the deferral of certain tax payments in both the United States and the United Kingdom. As previously communicated, my expectation for full year 2021 was operating cash flow in excess of $300 million. With our upward revision in 2021 revenue expectations, I am still targeting the same level of operating cash flow performance, but it is possible that we may not eclipse the $300 million target should our working capital investment be greater than expected during the fourth quarter. Please turn to slide 11. MCOR's balance sheet remains strong and liquid. Cash on hand is down from year-end 2020, driven by cash used in financing activities of approximately $213 million, inclusive of $183 million used for the repurchase of our common stock, and cash used in investing activities of $137.5 million, most notably due to payments for acquisitions net of cash acquired totaling approximately $114 million. These uses of cash were partially offset by cash provided by operations of $114 million, as I noted just a few moments ago. Working capital has increased by nearly $20 million. Increases in accounts receivable on contract assets resulting from our substantial organic revenue growth during the period. We're partially offset by the decrease in our cash balance just referenced, as well as our increase in contract liabilities. The increase in Goodwill is predominantly a result of the five businesses acquired during the first nine months of this year. Net identifiable intangible assets have increased by $19 million as the impact of additional intangible assets recognized in connection with the previously referenced acquisitions, which was largely offset by $48 million of amortization expense during the year-to-date period. As a reference point, on a full year basis, we anticipate depreciation and amortization expense, including both depreciation of property, plant, and equipment, as well as amortization of intangible assets to be approximately $112 million for 2021. Total debt exclusive of operating lease liabilities is fairly consistent with that of December 2020. and MCOR's debt-to-capitalization ratio has reduced to 11.4% from 11.9% at year-end 2020. MCOR remains well-positioned to capitalize on available opportunities as our balance sheet, combined with the borrowing capacity available to us under our credit agreement, provides us with great flexibility in pursuing numerous organic and strategic investments. With my portion of this morning's slide presentation completed, I would like to give the call back to Tony. Tony?
spk05: Thanks, Mark, and I'm going to be on page 12, remaining performance obligations by segment and market sector. We had another strong project bookings quarter here at MCOR. Each of our five reporting segments saw RPO growth year-over-year while, as we mentioned earlier, simultaneously increasing revenue over the same period. We also saw RPO growth in seven of the eight market sectors in which we report. By definition, RPO and project bookings are forward-looking, So it's fair to say that we're currently seeing strong future demand across all of our segments and market sectors. While September 30th is a single point in time, and projects certainly ebb and flow, we are well positioned moving into 2022. As mentioned earlier, total company RPOs at the end of the third quarter were just under $5.4 billion, up $849 million, or 18.7%, when compared to the year-ago level of $4.5 billion. Organic RPO growth was a strong 15.6%. Year-to-date for the nine months completed in 2021, total RPOs have increased $784 million, or just over 17%. The strong booking activity across the company translated to a book-to-bill ratio well over one, despite the company generating record revenues. Our two domestic construction segments experienced strong construction project growth in the quarter, with RPOs increasing $606 million or 16.5% from the same period last year. RPOs were lifted slightly by two Midwestern electrical construction and services acquisitions completed this year. Building services saw RPO levels increase $180 million or almost 29% from the year-ago quarter. $142 million and $180 million was organic. We continue to see widespread small and short-duration project demand and believe this will remain active through the end of the year and into 2022 as workers return to buildings, campuses, factories, and institutional facilities across the country post-COVID, and as the Delta variant hopefully continues to subside. Our industrial services segments, our RPO increase of 53 million from September 2020. Work within our heat exchanger shops has been building, and while still lower than historical levels, pricing appears to be improving a bit. Further, we continue to build capability, execute fixed price contract work, and both our electrical and mechanical trades in this segment. While this segment remains challenged due to macroeconomic forces, we are starting to see signs of increased activity, much as we expected as we move into 2022, and that is good news. In summary, we continue to see strong momentum in our core markets and our scale, diversity of demand, and the ability to pivot to more resilient sectors has allowed us to continue to have strong bookings and RPO growth, but also very strong organic revenue growth. I'm now going to finish our discussion on pages 15 and 16. We are closing in on yet another record year of performance at MCOR, despite a very difficult operating environment. At the beginning of the year, we expected that margins would be under some pressure. but we believe that we would have the necessary revenue growth to offset any margin compression. We foresaw the supply chain issues, but quite frankly, they are worse than we expected. We not only have seen increasing in volatile pricing, but lead times that extend two to three times normal levels. Energy prices, especially gasoline and diesel costs, have increased by more than we anticipated. We also expect COVID to be much less impactful than it was as a Delta variant caused disruption on some job sites and sent some key supervision into quarantine. Working in this challenging environment, we continue to deliver in a no excuses manner and execute well for our customers while keeping our employees safe. Despite such headwinds, we are raising our guidance. Our new guidance is diluted earnings per share of $6.95 to $7.15. and we now expect to earn revenues between $9.80 billion and $9.85 billion. As we close on 2021, we do expect to continue to be challenged by supply chain and productivity issues, but we will work through them as we are resilient. We expect the non-residential market to show mid-single-digit growth in 2021 and expect that momentum to continue into 2022. like all large employers, will have to navigate complying with the Pending Emergency Temporary Standard, or ETS, with respect to mandatory vaccination and testing, and the executive order mandating vaccination on federal contracts. The ETS has not been released, and therefore, the related costs to comply and the impact to our productivity are unknown. We expect to generate additional operating cash flow in the fourth quarter, and we expect to continue to be balanced capital allocators. To date, in 2021, we have repurchased $183 million in MCOR stock, paid $21 million in dividends, and invested $114 million in acquisitions that will continue to position MCOR for long-term and sustained growth. Our board of directors just authorized a new and our largest share repurchase authorization of an additional $300 million. we continue to have a very active acquisition pipeline. I am thankful for our MCOR team members and leaders for their dedication and resilience as we continue to focus on employee safety and delivering for our customers. As always, thank you for listening and your interest in MCOR. And with that, Jerome, I will now take questions.
spk00: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. And to withdraw your question, press the pound key. Your first question comes from Sean Eastman with KeyBank Capital Markets. Your line's open.
spk04: Hi, team. Great update. Morning, Sean. Morning. Great quarter. Thank you. So everyone is obviously worried about labor availability, supply chain, inflation. You guys touched on it quite a bit in the prepared remarks. But maybe just in short, Tony, what's the playbook for running the business in this sort of resource-constrained operating environment? I mean, you know, what are kind of the one, two, three things you're doing or, you know, really focused on as we look out the next couple quarters?
spk05: You know, Sean, it really comes down to a couple things. The labor availability I'm going to put to the side for a minute. I think our folks over a very long period of time have figured out how to navigate through labor availability. And now we've learned how to navigate through disruptions to labor with the pandemic on our job sites. So I think we know how to do that. I think we'll get through that. And we've done it before in high gross markets. We're blessed with some of the best local management that you could have that really understands their labor and understands how to keep good supervision on job sites. Going to the second point on supply chain, you know, I think now's the time in some ways you get rewarded for being a good partner. MCOR has never been known as a company that takes advantage of its suppliers on terms or doesn't do what we say we're going to do. We also don't blame suppliers for things that were our problems, which could be common practice in our industry at times. So we're known as a pretty good partner for a supplier. and that's paying dividends now. Where you see that most is at the distribution level. Most of what we buy comes through distribution in some form or another, and we have very good OEM relationships. And because of our scale, we have the ability to make sure on our most important jobs that we can keep availability as good or better than anybody else. The thing that might be a little bit different in this playbook right now is how you deal with the short-term, quick-term service work. You know, one of the things we pride ourselves on is keeping our customers' facilities, factories, educational facilities, institutions, healthcare facilities up and running. When someone makes a commitment to us on a six-week project that the materials are going to be there, we believe them. And in today's world, I think that's become more problematic, not because our suppliers don't think they can deliver it in that time period, it's that sometimes they can't. So we've had to go the extra mile of communications And it really has changed some of our planning before we, something as similar as demo something, what I mean by that is demolish something so that we can build because we have to keep our customers' facilities running. And it could be as simple as, you know, we were getting really good at on time, right on place delivery of service parts. I think some of that's going to go by the wayside for the next six to nine months as we just like to make sure we have it in our hands. before we start a repair. So there are a lot of variables going on. It's a thousand details. So the first one is labor availability, a lot of communication. The second way in our supply chain, having been a good partner, we're being rewarded for that now. Lots of communications. Don't get too advanced in the project until you're sure that you have the materials you need to execute to the next part of the project. And then the third one is be very clear on contract terms. I'm actually pleased with how we've been able to work with our customers through these supply chain issues and through the pandemic. Everybody seems to have the attitude right now that we're all in this to some extent together, and we're just trying to get to completion and get a building built, get a data center built, get it commissioned and online. And, you know, a lot of planning has to go on. It's less than ideal. You know, unfortunately, things like this teach you new lessons. that in some ways will make you better long-term, but I would just leave you with this. The supply chain issues are unprecedented. I'm seeing lead times I've never seen in my career, and I've been doing this a long time. That is almost as big of an issue for us as pricing, or is a bigger issue. Mark, anything to add there?
spk06: No, Tony. I think, you know, Sean, it's unprecedented, at least in my professional career, And not to overplay this, but I think the fact that we have longstanding relationships within our supply chain is certainly advantageous to us. But ultimately, there's a lot of things that have to happen on the front end in order for us to continue to be successful. And we'll contingency plan to the best that we can. But ultimately, there's only so much we can do. And I think we've been successful to date. And based on our revision and earnings guidance, we don't see any reason why we'll not continue to have the same levels of success as we move forward through the end of 2021.
spk04: Okay, great. All right, that's helpful. And then maybe just trying to connect the dots between, Tony, your last comment there, just on unprecedented supply chain, lead times, and not getting too advanced on a project until you're sure you have the materials, sort of balancing that with this you know, huge momentum in RPOs and in the bookings trends year to date. I mean, you know, the RPOs are up mid-teens organically. Clearly, that supports some nice growth into next year. But do we need to kind of moderate our expectations around kind of, you know, how much you're going to let the business grow in this kind of environment? I mean, you know, if you can sort of level set on a reasonable expectation for growth into next year, even qualitatively around these dynamics, that would be helpful.
spk05: Yeah, look, Sean, we've always had the belief that we typically in a good market grow a little, grow better than what the non-res market's going to grow. We are in some resilient sectors. And so we're not going to hold back when we can win good work and we can responsibly execute that work. And so if you look at our RPOs, we believe that that's representative of what we think we can accomplish at those elevated levels. I think what happens in this kind of environment, and we've seen this over the last two or three years, is there's a definite, especially at the two ends, right? Owners, where you're doing a service project or a retrofit project, want to go with quality people that know how to do the work and can plan. And you think about it, there would even be more reason to want to deal with a they know that we have the resources to make that happen. And on the top end, at the project level, you're competing against a budget a lot of times now, but people want to be with well-resourced companies, and that's beyond just financial strength. That's what the resource is to actually do the planning, to learn from each other, to be able to draw on the kind of supplier relationships Mark and I talked about, and to have very clear communications on what we can accomplish and on what schedule. So I don't think there's a fixed amount which say this company can grow. It's very much a bunch of individual decisions in local markets and sectors. And I think the appetite for larger projects is out there with some of our owners. I tell you what you do see in this kind of environment, and I think what we're benefiting from, some of our construction manager and general contractor customers in a market that may have less complication sometimes would like to cut up a job, right, and give different pieces to different people. In this kind of environment, you'd rather be with somebody like us and let us worry about multiple parts of the project and multiple trades on that project. What I mean by that is not necessarily intermixing our electrical and mechanical work, but we can take a greater mechanical scope or a greater electrical scope on a project. And so we are seeing that. And that might be part of what's underlying that RPO growth.
spk04: Very interesting.
spk05: All right, I'll turn it over. Thanks, guys. Thanks, Sean.
spk00: Your next question comes from Adam Palmer with Thompson Davis. Your line's open.
spk03: Hey, good morning, guys. Congrats on a great quarter. Thanks, Adam. Hey, Tony, what would be your thought on margins and backlog?
spk05: You know, Adam, I don't have any reason to believe that we haven't booked work at an acceptable margin. Now, margins fluctuate quarter to quarter, as Mark talked about. We're still well above even in the quarter, three-year averages. You've been following us a long time. I think you would agree, for the most part, these are very good margin levels, especially with the headwind that we're seeing in industrial with no real operating income margin contribution. Some of that has to do with contract structure. As you get to the bigger jobs, right, you might be working on more GMP or guaranteed maximum price type contracts that adjust, and there's more cost transparency. Some of it will have to do with the quick-turn service work and the margin there. So we don't ever sit there and say, you know, hey, there's a specific margin and backlog we're looking for. Quite frankly, it's a tough thing to measure. But what we do look for is say, do we have the right work, the right people, and the right tools to earn an acceptable return on capital employed and return on investment and return on labor for that project work? So we feel good about what we have in RPOs. We think it's as good a mix as we've had. But again, that will fluctuate quarter to quarter. Mark?
spk06: Yeah, Adam, really nothing to add to that. I think when you look at our year-to-date margin performance, it is quite strong. Clearly, because of the complexity of this business, you do get some margin fluctuations quarter to quarter, depending on the timing of work. We are on the front end of a lot of large work right now, and as our history has indicated, we tend to be a little bit more cautious with profit recognition at that point until we're fully established on the job site, and clearly with everything that was required as a result of the COVID-19 pandemic. we're being extra cautious with regards to our labor on site and obviously how we're working with the other trades around us. We certainly did not tell our operating teams to reduce their level of expectation for profitability on work as they're approaching their markets. We're clearly requiring the same level of excellent execution amongst all of our projects and service opportunities so that it hasn't changed. So I don't see that our future is going to look any different than our recent past. And we're going to continue to perform well for all of our stakeholders.
spk05: Yeah, let me tie together a couple thoughts there for the broader group. And Adam, you gave us a good opening to do that on page 13 and 14. So we talk about what we had in these resilient sectors and these growth opportunities. And so when you look at page 13 and you see data centers, warehouses, industrial manufacturing, healthcare, water and wastewater, mechanical services, and there are quality of fire protection. Everything we've talked about for the last year and a half is still very strong. And some of them really stand out. I mean, fire protection continues to be a very strong market for us. Uh, we are the nationwide leader, especially in the installation side. And we got to be two or three on the service side now. This digital build-up, data centers and the digital infrastructure around supply chain that's happening within the country, maybe they should let some of those guys take over the ports and figure out how to get that done. But what we're doing within the country is pretty strong. And the data center market continues very strong, as does the infrastructure for the supply chain for the big delivery services. Industrial manufacturing continues to be, I think, three stories for us. The first story is we're really good at tech manufacturing and supporting tech manufacturing. And you think what's going to happen with the chip build-out, we're well-positioned in a couple markets where that's going to take place. You think what's happening in food processing, which is going to continue to grow, we're very well-positioned with our Shambaugh subsidiary. They have some nice opportunities in front of them. They tend to be episodic. But that team really knows how to execute, as does our tech manufacturing people. And finally, the reshoring of manufacturing is a real trend. And these supply chain issues continue to exacerbate that. We've been talking about it for two or three years. We continue to see that. And you really see it in things like the things on pharma, grid resiliency, and finally on building products. You see it in all three of those areas. Healthcare continues to be a good market for us. Uh, and it's going to continue to be one thing we learned in the pandemic. And I think our healthcare customers obviously are dead serious people. Uh, and as a result of that, they're looking to build more resiliency and more flexibility into their facilities. And they realize their mechanical systems, especially, uh, may need to be updated and made more flexible. Water and wastewater for us is a, is a more localized market on the mechanical side. much more national on the electrical side, although certainly not as big a scope. Mechanical services, indoor air quality, and energy retrofit are all very strong markets for us. What you're seeing a little bit in the building services margin is not so much that the work wasn't good at RPOs. What you're seeing in some ways is that's where the supply chain issues came to a head the fastest. That team knows how to execute. They've been correcting it. Maybe we had a couple, you know, Twenty-five percent of the problem was ours, but 75 percent was probably externally driven. And across all those sectors, the fire protection business remains very strong. I would add one more, and that's with respect to energy transition. I mean, clearly, as a big trades contractor, we have something that's very valuable for people to use. We will participate in the energy transition and already are. We have solar capability. We've done some projects both in our electrical segment, and we've now started to really build a capability in our industrial services segment to do that work. That work has long lead time, though, I mean, and we'll participate there. We also do solar work in conduction with our mechanical services work, especially in states like California, New Jersey, and in New York and Arizona. So we do that work today. And it's more, you know, low megawatt, you know, a megawatt or less provider versus the 200 megawatt sites that our electrical segment may do or our electrical trades in the industrial services. And then finally, you know, as you start thinking about things longer term like carbon capture, it's pipe. And there'll be a lot of piping done around that, and that will happen both in our mechanical construction segment and our industrial services segment. And we're at best on some of those ideas in the first or second inning. We're seeing our customers already start to talk to us about us and the capability we'll have there. And the thing you don't think as much about and something we are participating in in the industrial services segment, and again, it's in the first inning, is the renewable fuels that some of our refinery customers are actually adapting their facilities to do. And again, it's electrical system upgrades. And it's pipe, both of which we're pretty good at. So put all that together. We feel good about some of these growing markets. Now, go to page 14. We have some headwinds, right? I mean, everybody's wrestling with the same thing right now on supply chain. And, you know, you go in a worse, what did we expect at the beginning of the year when we made guidance? That as the year progressed, if you remember, we were doing a little bit of whining about supply chain in our first quarter call. In our second quarter call, we did a little more whining. And here in the third quarter call, we're talking about it more. So we expected good availability, but some price increase. Material prices are volatile and increasing. But that second point we make on the lead times. So, Mark, what we'll probably see, right, is the projects are going to go. They'll move forward. They may slide to the right. You see some of that already in our numbers. And so what that really affects for us is our ability to recognize revenue or profit at a certain time versus what we planned. And sometimes we may have a gap, right? We may have labor that we need to keep on board because the schedule has been elongated a little bit. We're pretty good about not doing that, but that could be one of the productivity issues that we wrestle with. So, you know, Adam, you gave us a chance to talk more comprehensively about it, but I hope that answers a lot of folks' questions about how all this knits together.
spk03: Okay. Great color. I'll turn it over.
spk00: And your next question comes from Zane Carini with DA Davidson. Your line's open.
spk01: Hey, good morning, Tony, Mark, Kevin, and congratulations on the solid quarter. Morning, Zane. Thanks, Zane. So I know you guys alluded to it earlier, but can you provide some more color around any of the impacts of the industrial segment related to the storms in the south?
spk05: Mark, I'll let it turn it to you.
spk06: Yeah, Zane, I mean, clearly, you know, the storm activity in the current year third quarter was not as exaggerated as it was a year ago. But, you know, clearly Ida and to a lesser extent Tropical Storm Nicholas were impactful, most impactful to our customers who basically they had to close their facilities as a result of that, which ended up deferring some of the work that we were anticipating and doing in the third quarter. So that work – for the most part, has trickled into quarter four. However, some of it looks like it actually might trickle into the first quarter of 2022. So certainly impactful, but last year's quarter was much more impacted by, I believe there was five named storms in the third quarter of calendar 2020, most of which did impact us or our customers in some way, shape, or form. So we did have lost workdays this quarter, but still we're all happy with the performance of that segment, certainly on a comparative basis to a year ago and how that market is developing for us as we move forward in the year.
spk05: Yeah, Mark, I think one of the things we see in general with industrial services, Zane, is we've communicated correctly here at this level about how we thought the year was going to roll out and how things would strengthen and where the opportunities would be. We can only do that because that tells you how in tune our folks are with their customers and what kind of position we have with our customers to be able to actually get a pretty good handle on how the market's evolving. I don't think that's necessarily that common with some of our competitors, but it shows you the depth of our customer relationships, but also the sort of market awareness that our team has. The other thing is, you know, when you get to that, the impact of storms, we can't control what happens within our customers, but we've started to do a much better job of, in our case, is we've done more and more things to harden our facilities to be able to withstand the storms much better over the last 18 months than we had previously. And we're going to continue to do that.
spk01: Great. Thank you. And then one more. You guys did mention solar, something that's interesting, but can you talk a little bit about the M&A environment that you're seeing now and how you're feeling about that going into 2022?
spk05: Yeah, so look, I've been a consistent whiner over probably 10 years complaining about the prices private equity will pay and the things they will do and deal structure. You know what? Somehow we've managed to do a bunch of very successful deals with the right people at the right time. And I think our acquisition program over the last five years has been as well executed and as well integrated as almost any time in our history. I think it has been the best time in our history for M&A. All that being said, we've made some progress, right? We've done $114 million year to date. I think the way we've described it, we expect to be able to at least replicate what we've done from 2017 through 2024. Deals happen when they happen. We have a lot of discussions going on. It's a pretty active market. For every one deal that may even get to the point where I'll look at, we've looked at 10. Our business development team, and they're really good, working with our segment people to get that down to something we can look at. We've done some creative things around the companies we've just bought. We bought our first ESOP, and we did it extraordinarily well, and we're very happy with the incorporation of that very fine electrical contractor in the Midwest into our family. That was something we hadn't done before, and we figured out how to do that. And where that opportunity presents itself, we will be a buyer. We think that could be a good market for us. We aren't competitive when it's a broad auction with 15 private equity people throwing in numbers, bidding the book. So, you know what? I'd say more of the same. We continue to see opportunities, and we love where our balance sheet is to be able to do those deals. We can always look at somebody and say, we can close, and we can close without condition on financing. And I'd add one other thing, broader speaking. We continue to attract folks that are selling their life's work or their family's generational life's work. And we're a good home for those companies. And, you know, I was in a discussion several weeks, a week ago with someone, and you could see the pride in that person of what they build as a team. And hopefully we'll be able to make that deal here at MCOR. And we're out there doing that all the time. So all that being said, an okay environment. I'll add one other thing when you go to the balance sheet. You know, we take for granted the success we've had with our balance sheet. That balance sheet is a point of competitive differentiation for us. I believe, and I think Mark believes, and our segment leadership believes, that having that liquidity on our balance sheet is something these bigger customers look to because they know we're going to complete the job. They know we're going to have the working capital to get it done. and they know that we're not going to – it's sort of endemic of how we think about the business overall. We take measured risk, and that's how they want us to do if they're entrusting us to do an $80 million project that's going to burn in 13 months in its critical data infrastructure. So you can't separate the two, and it's not only a point to allow us to fire power for acquisitions, but some of this good, great underlying organic growth you see is because customers trust us to be measured, conservative, and thoughtful, and how we approach the overall business.
spk01: Great. Well, thank you for all that, and I'll jump back into Q. Thank you.
spk00: All right. Thank you. No further question at this time, so I'll have to call back to Tony Guzzi for any closing remarks.
spk05: Yeah, thanks, you all. It's certainly been an interesting year, and I want to, again, just finish by thanking all our MCOR employees, Our subsidiary teams, you've done a great job. Our segment teams, you know, I know the four of us sitting around this table today feel blessed to be able to be on the same team as you all. Stay safe. And I'm not going to wish you a happy Halloween because it's probably the holiday I care least about. But we won't see you until after the holiday. So happy Thanksgiving and a happy holiday season. Thanks. Bye.
spk00: Thank you. And that concludes today's conference. Thank you all for joining. Give me now this connect.
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