The downturn in the private nonresidential building market that started in 2001 hit the construction industry hard in 2002 and nobody felt it more than specialty contractors. In a statistical rarity, more than half of ENRs Top 600 specialty contractors saw revenue decline last year. On average, revenue for the group fell 10.3% in 2002 after slipping 0.6% the previous year. By comparison, the Top 600 reported a 24% increase in revenue during 2000, the last year of constructions decade-long expansion.
The downturn in nonresidential building construction was particularly troublesome for subcontractors. ENRs Top 600 firms derived 53% of their annual revenue from that market last year. Another 24% of the groups revenue was tied to the even more devastated industrial, manufacturing and power markets.
The downturn has taken its toll on profits. In 2002, 8% of the Top 600 say they operated in the red. This is double the 4% average for firms claiming losses during the previous two years. Those subs reporting profits for 2002 saw margins shrink to 5.8%, down from 6.3% in 2001 and 7.3% in 2000.
|(Photo courtesy of Dave Hinaman / |
Chronic late payments are not helping the financial situation. Top 600 contractors report that 35% of payments owed them are late by an average of 40 days.
This year, things are going from bad to worse, as indicated by a 16.4% decline in new contracts signed by ENRs top specialty contractors in 2002. "In 25 years in the business, I have never seen so many firms leave the industry," says Frank Williams, partner of the Williams Group, the nations second-largest steel erector. "We keep our overhead and debt low so that we are structured to survive these down cycles," he says. "Survive until 2005 is what we keep hearing."
E. Colette Nelson, executive vice president of the American Subcontractors Association, says her members are rather somber about prospects going forward. "Theres a tremendous amount of uncertainty," with firms holding back on investment in growth, market diversification, even equipment purchases, she says. "And they dont see 2004 being better. There a growing concern that federal money may be used for things other than construction in the U.S.," Nelson adds.
|(Photo by Tudor Hampton for ENR)|
The disintegration of last years number one specialty contractor, mega-rollup Encompass Service Corp., which filed for bankruptcy last year, cleared the way for number two, EMCOR Group Inc., to finally reach the top spot on the 2003 list. Even with poor market conditions continuing in the commercial construction market and other sectors, EMCOR saw its mechanical contracting revenue rise 28% to $2.1 billion in 2002.
EMCOR President Jeffrey Levy attributes part of that market growth to EMCORs acquisition last year of the union operations of rival Comfort Systems USA (ENR 2/18/02 p. 12), as the latter firm moved to reduce its debt load. EMCOR acquired 19 businesses, which caused Comfort Systems revenue to drop by nearly $70 million in 2002 from 2001. The falloff did not alter its seventh-place ranking among the Top 600.
"The biggest trend this year is that investment in office space is basically negligible," says Levy. Less hiring and more dependence on existing staffers working remotely or at home means lower square footage requirements. Levy says owners are sticking to conservative business plans. "This year, there is an avoidance, to the greatest extent possible, on discretionary spending," he says. "Theres a lot of [project] deferrals and cancelation of smaller jobs. When businesses are not sure of whats happening, they want to hold onto their cash and not overcommit on space they wont need."
As with other firms, EMCOR sees institutional worknotably in health care and medical researchas the prescription for a healthier bottom line. Levy sees development of more stand- alone medical facilities and whole research campuses as an emerging market. "There is tremendous investment in high-end research facilities," he says. Universities see such R&D centers as key to drawing more government funding and top researchers.
EMCOR also is tapping the public sector for work. "Were doing more work in the public sector this year than in the last several years," says Levy. New jobs include installing mechanical systems in a new federal building in San Francisco and electrical systems at the new 700,000-sq-ft International Monetary Fund headquarters in Washington, D.C.
|(Photo courtesy of Gary L. Franks)|
Dwindling telecommunications work and the switched-off power market darkened EMCORs electrical contracting revenue, which was down 9% over a year ago. But Levy believes this years East Coast blackout could spur clients to revisit their emergency power and monitoring systems. "We see individual companies now assessing whats mission critical," he says. "Companies must take steps to protect their interests."
The new emphasis on building systems has prompted EMCOR to beef up its facilities management capabilities. Levy expects the acquisition last December of Consolidated Engineering Services Inc., Arlington, Va., to add $400 million to EMCORs revenue this year.
While Levy says the EMCOR "brand" is more visible in the marketplace, it wont make the mistakes of the industrys failed rollups. "We dont make synergies happen," he says. "We let them happen on their own. The punchline is always performance."
Electrical and utility contractor InfraSource Inc. also saw its revenue fall last year in a stagnating power market. Those woes last year were compounded by an increasingly uncertain corporate existence within publicly owned utility giant Exelon Corp. But things may be brightening for the InfraSource group of power and telecommunications contractors with its acquisition last month by two equity investment groups for $280 million (ENR 9/29 p. 24).
"We needed to find better owners," says David Helwig, InfraSource CEO. "Our companies are strong, but Wall Street didnt like utilities having unregulated businesses." About 28 managers now own 15% of the company, he says.
Going forward, Helwig sees opportunity in pent-up demand for power transmission and distribution. It will be at least a $10-billion business "once we get a [Federal Energy Regulatory Commission] ruling on how to get return on investment," Helwig says. InfraSource units such as MJ Electric Inc., Iron Mountain, Mich., and Dashiell/Dacon Corp., Houston, have major transmission and distribution and substation capabilities "and they will continue to operate under their brand names," he says. "Were very much not a rollup. Were complimentary."
There is growing optimism among electrical contractors, says John Grau, CEO of the National Electrical Contractors Association. "They may not be doing more work, but they see it coming.
|(Photo courtesy of Jim Still / NCS)|
Some companies are already seeing an uptick in the electrical market. Miller Electric has 10% more work so far this year than it did in all of last year, says Ron Autrey, president. "The outlook in Florida is good for 2004. We expect at least another 10% increase in work next year, he says.
One problem that Miller and other contractors still face is a shortage of skilled workers. Despite the downturn in nonresidential building, over half of the Top 600 firms said they were experiencing some labor shortages.
"The predicted need in three years is twice the number we have now, Miller says. The electrical workers union and NECA are determined to increase the unions market share of work. "But there simply arent enough workers to do that, says Autrey. Union contractors account for 60% of the Top 600, while nonunion firms make up 27%. Firms that have both operations occupy 13% of the list.
Worker shortages are a developing problem for the high-voltage market, says Walter Parkes, vice president of OConnell Electric Co. "There hasnt been much transmission work in the last 20 years and it takes four years to train a worker, he says.
The high-voltage market will increase gradually over the next two years, says Parkes. OConnells line division did $30 million of work last year, which Parkes expects to increase to $45 million next year. The amount of work the companys three divisions had last year decreased by 18%. "It will take 18 months to get all those sales back, says Parkes.
Another worry for electrical contractors is the move toward the direct purchase of materials by the general contractors, says Grau. Preliminary research funded by NECA shows that the idea of cutting out the middleman may appear to save the client money, but it may not in the long run. "The major issues are knowledge transfer and safety, says Perry Daneshgari, president of MCA Inc., a Grand Blanc, Mich., research company. "As long as the subs do not understand what materials are being bought, rework will increase and the cost to the end user will go up, he says.
But Daneshgari believes that the traditional way subs procure materials is inefficient and he believes that a third model will emerge, similar to the one used by airlines and automotive manufacturers. "It will be a partnership between the manufacturer, the distributor, the general contractor and the subs, he says. "Everyone will make money and the costs will go down.
Helix Electric Inc. recorded $160 million in revenue in 2002, a 19% increase over the previous year. It attributes the growth to more public works and high-rise condominium projects. Low interest rates have bolstered developer confidence, says Helix President Gary Shekhter. As such, the 1,300-employee firm expects a more modest 5% increase in revenue this year, followed by a 10% increase in 2004.
Four major specialty contractors joined the Top 600 this yearthird-ranked Johnson Controls Inc., 12th-ranked Railworks Corp., 15th-ranked Keyspan Business Solutions and 26th-ranked XServ Inc.; all but Railworks are participating in the survey for the first time.
Owners seeking to upgrade security or improve a buildings energy efficiency have helped Johnson Controls keep revenue growth "near double-digit levels," says Alex Molinaroli, vice president of sales and marketing. "The security market is really strong and that makes up for some of the other markets that are not spending today," he says. Molinaroli believes the market is going to "speed up" as the federal government starts funding many of its homeland security mandates.
Railworks appearance on the Top 600 list will be short-lived, says Jim Kimsey, the firms CEO. The firm exited bankruptcy at the end of 2002 and Kimsey restructured it, shedding many specialty contractor units that did not fit the firms new focus on light-rail construction. Old-line electrical contractor Comstock is still a "vital part" of the Railworks group, providing signal, communication and power installation, says Kimsey. "But we are competing against the Kiewits and Granites now, and we will be moving over to [the Top 400 general contractor list] next year."
XServ joins the Top 600 following a restructuring that returned it to profitability after financial difficulty in 2001, says CEO Michael McGinnis. "We reduced revenue by design, becoming more selective in what we bid on," he says. XServ trimmed revenue by 14% and focused on its core market of industrial insulation and scaffolding. XServ also started chasing more maintenance and long-term contracts, which have better margins, says McGinnis. "Our focus has been on margin improvements and not revenue improvement," he says.
|(Photo by Guy Lawrence for ENR)|
Centimark Corp., the nations second- largest roofing contractor, also de-emphasized revenue growth in favor of projects with better margins. "New sales through the first nine months of this year are down 2% from last year," says Edward Dunlap, the firms CEO. "But our profits are up 100% for that period."
Centimark hit its profit goals by gradually downsizing over the past year and a half, says Dunlap. "We did 10 roofing types when we were trying to be all things to all people, but we phased out six of them and are sticking to the products we know best and generate the type of profits we want."
Taking a different tack, Schuff International Inc. increased revenue by 169% in 2002, one of the largest jumps among the Top 600 contractors. However, nearly all of Schuffs increased revenue comes from its steel fabrication business and its new On-Time Steel Management subsidiary, started in August 2001. Schuffs revenue from steel erection work was up just 18% over 2001s level.
Schuffs new On-Time subsidiary bids and contracts for projects, but subcontracts out all fabrication and erection work. By re-bidding this work in the open market, On-Time is able to deliver competitive steel pricing at a profit.
"In a down market, its easy to find a lot of people who need help through a broker," says Scott Schuff, company president. "This year is pretty flat, but in 2004 we expect to see an 8% increase in revenue," he says. "Were seeing some of the industrial sector starting to come back and also some new powerplants and plant upgrades as the industry works its way through the post-Enron cycle."
|(Photo by Guy Lawrence for ENR)|
The fierce competition in the steel erection market is taking its toll. "Its a time of survivorship," says Robert Abramson, CEO of Interstate Iron Works Corp., the nations fifth-largest steel erector. "A lot of companies that were chasing real cheap work are not going to be around to see the recovery."
Abramson compares todays market to that of the early 90s when there was a severe shakeout in the steel erection market. He believes that the survivors this time around will need to consolidate and that is why Interstate is merging with SteelCo., a large Reading, Pa.-based fabricator and erector. The move will more than double the size of Interstate.
The Williams Group also is in survival mode, says Frank Williams. The firm is phasing out its venture into equipment rentals. "We got stretched in that business more than we should have but the equipment market is so soft that I dont even know if you can give it away," he says.
The Williams Groups 2002 revenue benefitted from a 2001 acquisition of a large bridge girder fabrication facility in Alabama that opened up parts of the Southeast market to the firm. "It has been a good market for us," says Williams.
Standard Drywall Inc. also used an acquisition to boost its revenue by 23% in 2002. The firm purchased a $15-million backlog from financially troubled Commercial Enterprises, Lakeside, Calif. At least 50% of the jobs, mostly in the San Diego area, were ready to go, says Robert Caya, president. "We expect to record $75 to $80 million in 2003, or slightly less than 2002, due to the one-time backlog purchase," says Caya. "We are anticipating that the first six months of 2004 will be strong."
|(Photo courtesy of Dave Hinaman / |
With public works spending likely to be on a declining path next year, Midwestern demolition contractors are betting more on industrial site-preparation work for increased business. Bill Moore, vice president of marketing for Brandenburg Industrial Service Co., says his company last year pulled in $89 million in revenue, a 1% increase over 2001. Moore sees some shifting focus to the automotive market next year. Brandenburg hopes that automotive manufacturers capital expenditures will account for 20% of its business next year. "The Big Three [auto makers] are beginning to retrofit their lines," says Moore.
Curtainwall firms are less optimistic, but are still holding on. Peter Koukos, president and CEO of Enclos Corp., doesnt expect commercial activity to ramp up for at least another six to nine months. "I really think that corporate America needs to have two to three good quarters before its starts hiring people again," he says. Louis Podbelski, executive vice president of Harmon Inc., agrees. "Were not really going to see anything turning around until the second half of next year," he says. Koukos expects his firms revenue to slip by approximately 8% in 2003 and remain flat into next year.
|(Photo by Guy Lawrence for ENR)|
Harmon is trying to hedge its bets by offering more non-traditional glass-and-glazing services. However, "its not like we are waiting around for the downturn to end," says Podbelski, adding that the companys growing line of curtainwall repair, replacement and renovation services now makes up as much as 25% of the firms business.
LVI Environmental Service Group Inc.s answer to the private-sector squeeze is to blanket the marketplace through geographical expansion and acquisition. "Within the last 12 months, we have opened offices in the Midwest, South, California and Guam," says Burton T. Fried, president of the abatement and demolition firm. "By opening these offices, we get better penetration in good markets," he says. "Were operating at a revenue rate greater than last year, which has offset other pressures." He expects 2003 revenue to hit $175 million.
Mold abatement work is continuing to increase, generated more by construction defects than natural disasters, Fried contends. Unlike asbestos abatement projects, with mold work "were dealing with relatively new structures," he says. "Its becoming more of a sensitive topic," says Fried, so sensitive that he declines to reveal client names or locations.
THE 2003 TOP 600 AT A GLANCE
2002 $ MIL.
2001 $ MIL.
|NEW CONTRACTS|| |
|FIRMS REPORTING|| |
|TYPE OF WORK|| |
% OF TOTAL
|HAZARDOUS WASTE|| |
|SEWER/ WASTE|| |
% OF TOTAL
|ASBESTOS ABATEMENT|| |
|GLAZING/CURTAIN WALL|| |
Ranked according to revenue from specialty, prime or subcontracting obtained in 2002.