The firms on EC&M’s 2010 Top 50 electrical contractors list reveal 2009 as a year of fierce competition for fewer projects with lower profits
In 2009, the effects of the recession, which officially began in 2008, took their toll on the total revenue for electrical and datacom services reported by the firms on this year’s Top 50 electrical contractors list. As owners and developers experiencing tighter credit standards delayed or canceled projects, even the top players in the electrical construction industry were forced to bid more competitively, extending their reach into new geographic areas and market sectors, to keep well-trained employees on the payroll and position themselves for the economy’s eventual recovery.
Last year, margins fell drastically for increasingly smaller and fewer projects. Notwithstanding a rise in the cutoff for the list by almost $10 million, as a group, the firms on the 2010 Top 50 electrical contractors list earned $12.7 billion in 2009, a 4.5% drop from 2008 (click here to see Top 50 Chart). Of the 37 firms present on last year’s Top 50 list, 11 reported a year-over-year increase in revenue for electrical and datacom services, with only four reporting a jump of more than 20% (Most Improved). By contrast, of the 26 firms that suffered a drop in revenue, nine revealed a decline of more than 20% (Biggest Drops). Together, the 37 firms experienced an average year-over-year decrease of 5.7%.
Yet, almost half the firms on the list reported meeting revenue expectations for 2009, and 16 claim to have exceeded their sales goal for that year. Only 10 firms admit to not meeting revenue expectations in 2009 (Fig. 1). “Although our earnings for the full year of 2009 were lower than in 2008, we are pleased with MYR’s overall performance amidst a very tough marketplace in both of our business segments,” comments Bill Koertner, president and CEO, MYR Group, Inc., Rolling Meadows, Ill., which dropped one spot to No. 5, despite generating a 2.4% year-over-year increase.
Several of the firms on this year’s Top 50 electrical contractors list gained or lost more than four spots in their ranking this year (Spot Changers). Most notably, Pittsburgh-based Wellington Power Co. (No. 35) shot out of its last place standing in 2009 by generating a 65.2% increase in electrical and datacom revenue, whereas Lake Erie Electric Cos., Cleveland, with a 29.3% decrease in sales, dropped from No. 39 last year to No. 50 this year.
The economy, stupid
With few exceptions, the firms on the 2010 Top 50 electrical contractors list characterized the 2009 economy as “fair” or “weak” (Fig. 2). Although many firms experienced increased competition and lower margins due to the lack of new, large projects (click here to see Table 1), the biggest challenge the recession posed was tightening of credit standards. In fact, 17 firms revealed experiencing tighter credit standards — for themselves or for owners, developers, and general contractors (GCs) (Fig. 3).
“Many of our customers have adjusted their capital and maintenance spending programs to align with the current economic activity in their end markets,” comments Koertner on MYR Group, Inc.’s 2009 year-end revenue. “Reduced utility spending has put pressure on contract margins for electrical contractors in the transmission and distribution (T&D) sector, as all competitors try to find work to keep labor and equipment resources busy.”
To offset their declines in revenue, many firms employed strategies that involved a reduction in overhead costs. “Our results are reflective of the many actions we have taken to better position our business across the economic cycle, as well as our disciplined approach to project bidding and cost controls, which allowed us to achieve increased operating margins for the full year despite lower revenue levels,” says Frank T. MacInnis, chairman and CEO of Norwalk, Conn.-based EMCOR Group, of the company’s 2009 revenue. With only a slight decline in its electrical and datacom services sales, the firm managed to hold onto its No. 1 spot.
Several companies reported closing underperforming locations or branches with redundant back office operations. “We took decisive steps to further reduce our selling, general, and administrative (SG&A) expenses during fiscal 2009 as we continued to strategically restructure our operations,” states Michael J. Caliel, president and CEO, Houston-based Integrated Electrical Services, Inc. (IES), which despite an 18.6% fall in year-over-year electrical and datacom services revenue traded in its 2009 No. 3 spot for the No. 2 position this year. “In closing fiscal 2009, we have essentially completed the company’s transformation process and restructuring programs that began in 2007. As a result of these efforts, we have reduced our cost base as we said we would and are on track to meet our commitment for annual SG&A expenses … in fiscal year 2010. We continue to monitor the economic environment and will adjust our cost base accordingly.”
In addition, more than half the firms disclosed a reduction in the number of employees working for their company from 2008 to 2009 (Fig. 4). Companies also began more closely monitoring employee performance and procedures for productivity and profitability. In 2009, the Top 50 firms changed up their project delivery methods (click here to see Table 2). Design assist overtook design-bid-build as the most popular method.
Furthermore, both performance- and prescriptive-based design-build continued to gain traction. For example, the Dallas subsidiary of Fisk Corp. (No. 6), Houston, grew its design-build business with two worship/assembly projects. It participated in the design of a 2,500-seat sanctuary and administration offices on an existing campus in Visalia, Texas, and a 28,000-sq-ft new and renovated office/classroom addition with assembly rooms in Melissa, Texas.
But not all firms shored up their operations in 2009 as the strategy to wait out the recession. Several firms exposed the dilemma of keeping experienced project managers and field personnel during the construction slowdown. Plus, expansion into other areas of the United States was a popular strategy for finding new work. Nine firms reported opening a branch office, and seven companies acquired one or more branch offices.
Although new construction still comprised the majority of projects in 2009, the number of firms on the Top 50 list working on retrofit projects for at least 50% or more of their work increased (Fig. 5). Credit for the increase can be attributed to both the shortage of large, new projects, as well as the growing emphasis on green building. For example, Dulles, Va.-based M.C. Dean, Inc. (No. 4) performed multiple design-build renovation services for School Without Walls in Washington, D.C., including the design and installation of architectural lighting, security, fire alarm, and voice/data. The school is expected to achieve the U.S. Green Building Council’s (USGBC’s) Leadership in Energy and Environmental Design (LEED) for Schools Silver certification criteria.
However, not all green construction in which the Top 50 participated was retrofit. For example, Fisk Corp. provided electrical contracting services to the MGM Mirage’s City Center, Las Vegas, which received six LEED gold certifications. Fisk’s City Center venues covered by the certifications include the two 4,004-room Aria hotel towers and the Aria’s Convention Center and Theater. “The magnitude of the experiences provided Fisk has proven invaluable — as seasoned Fisk employees knowledgeable in LEED recommended construction practices are now being incorporated into other Fisk operating units across the nation,” states Ken Orlowski, president and CEO. “Although sustainable, high-performance buildings do not have to be LEED-certified, more and more developers and owners are requiring that projects incorporate sustainable design and construction practices that are best quantified and evidenced by LEED certification.”
The City Center will produce its own energy through a reduced-emissions 8.5MW natural gas co-generation plant, demonstrating the increase in the number of firms that reported working on projects involving renewable energy sources (Fig. 6). “The generation and use of green, renewable energy will provide competitive advantages all across the economic spectrum,” says Caliel, IES’ president and CEO. “As an abundant and clean energy source, solar power offers significant economic benefit for both new and existing construction.”
According to Orlowski, these types of projects also contributed to the change in delivery methods used by the firms in the Top 50. “Successfully delivering on an owner’s desired sustainability level within budget requires knowledge, competency, coordination, accountability, and commitment by the GC, as well as the specialty contractors involved,” Orlowski explains. “It has been our experience that these can best be achieved when all parties are brought to the table in a collaborative environment early in the process, and typically where the project delivery method incorporates design-build or design-assist delivery methodologies.”
The firms on the Top 50 extended their reach into new traditional vertical markets, as well. As some markets became less active, others picked up. Even with the temporary stall caused by the health care reform debate, health care remained the most active market, according to the firms on the Top 50 list (click here to see Table 3). Bolstered by funding from the American Recovery and Reinvestment Act of 2009 (ARRA), as well as from advance budget allocation, spending on public projects has been climbing at a steady pace.
The electrical contractors revealed that voice/data/video also gained in activity. For instance, Fisk Technologies completed data cable installation for two data centers. One project contained 32,000 strands of 10G multimode fiber and 40 fiber distribution cabinets and included installation of Cat. 6 cabling upgrades to 60 locations in the Dallas-Fort Worth region. The second data center contained 2,300 Cat. 5E cables and 100 patch panels. Both projects were completed in November 2009.
Almost just as many firms that are expecting a decline in revenue in 2010 are predicting an increase in revenue next year, with around 20% forecasting no change from 2009 (click here to see Fig. 7). The firms expect many of the challenges they faced in 2009 to remain into the rest of 2010 and beyond, particularly the shortage of new large projects, increased competition, and low margins (click here to see Table 4). “There are some preliminary signs that the economic environment is improving,” predicts MYR Group’s Koertner. “Our bidding activity appears to have stabilized recently, albeit at levels below those of 18 months ago and with increased competition, which could affect our margins and backlog.”
Although many firms are preparing to offset any declines with a reduction in overhead, much still depends on the health of the vertical markets. “Some larger transmission projects have been deferred due to reduced regional load forecasts, permitting problems and/or ongoing uncertainty in the financial markets,” continues Koertner. “However, we do expect that certain other large projects will stay on schedule for bidding and may be awarded later in 2010.”
Health care and projects that receive public funding are expected to remain active in 2010 (click here to see Table 5). “We enter 2010 with a solid margin base and stronger financial positioning relative to previous economic cycles, but we remain cautious about the broader economic environment with a continuing lack of visibility in some of our end markets,” says MacInnis of EMCOR Group. “While we are seeing some stabilization in our overall backlog levels and growth in areas such as health care and government
services, there has been a shift in mix toward a greater percentage of public and quasi-public projects, which will affect margins during the year. Our focus will continue to be on execution and cost management, as well as bidding discipline. This bidding discipline may affect backlog growth and earnings power in the near-term but will enable us to retain capacity necessary to commit quickly to projects with more compelling economics when market conditions inevitably improve.”
Very few of the contractors on the list anticipate a big effect on the construction economy from stimulus funding (Fig. 8). However, several firms are predicting some funding to increase their revenue and/or backlog. “As anticipated, we have begun to see some contribution to our backlog from stimulus-related spending, as more technically sophisticated projects, which are aligned with our core competencies and typically take more time to engineer and design, begin to enter the market,” explains MacInnis.
The ARRA of 2009 includes $81 billion for electrical infrastructure projects, such as power and lighting work on highway, rail, and bridge construction and renovation. ARRA also provides another $50 billion for renewable and energy-efficiency projects, including photovoltaic (PV), solar thermal, and wind energy installations. Of the $11 billion allocated to bring the nation’s power grid up-to-date, it is estimated that $7 billion could go to contracts for electrical construction. Additionally, estimates claim 20% of the $7 billion to be used for renovation and repairs to federal buildings throughout the country would involve contracts for electrical work.
In addition to expanding into other markets, the firms plan to focus on client relationships and business development to increase revenue and pick up new projects, as well as delve further into project involving renewable energy and green building (click here to see Table 6). “Looking forward, we are encouraged by our pipeline of opportunities,” comments IES’ Caliel. “Through our business development efforts and investments in sales resources, we have seen measurable increases in our opportunity pipeline and bidding activity. This is the result of our refined strategy to identify and target projects where we can differentiate ourselves and our capabilities, as evidenced by the $61 million contract we recently announced to provide electrical systems for the U.S. Army Medical Research Institute of Infectious Diseases. With our expanded portfolio of services and solutions, we have increased our focus on renewables and are gaining traction in that area, driven in part by the desire for clean energy, Renewable Portfolio Standards, (RPS) and federal, state, and local incentives.”