Q3 2025 Earnings Call Transcript

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. At this time, I would like to turn the call over to Lucas Sullivan, Director of Financial Planning and Analysis. Mr. Sullivan, you may proceed.

Thank you, Chris. Good morning, everyone, and welcome to EMCOR's Third Quarter 2025 Earnings Conference Call. For those of you joining us by webcast, we are at the beginning of our slide presentation that will accompany our remarks today. This presentation will be archived in the Investor Relations section of our website at emcorgroup.com.

With me today are Tony Guzzi, our Chairman, President and Chief Executive Officer; Jason Nalbandian, Senior Vice President and EMCOR's Chief Financial Officer; and Maxine Mauricio, Executive Vice President, Chief Administrative Officer and General Counsel. For today's call, Tony will provide comments on our third quarter and discuss our RPOs. Jason will then review the third quarter and numbers, then turn it back to Tony to discuss our guidance before we open it up for Q&A. Before we begin, a quick reminder that this presentation and discussion contains certain forward-looking statements and may contain certain non-GAAP financial information.

Slide 2 of our presentation describes in detail these 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. And finally, as a reminder, all financial information discussed during this morning's call is included in our consolidated financial statements within both our earnings press release issued this morning and in our Form 10-Q filed with the Securities and Exchange Commission. And with that, let me turn the call over to Tony.

Tony?

Thanks, Lucas, and welcome to the call. And I'm going to be on Pages 4 through 5 of our presentation. Good morning, and welcome to our third quarter 2025 earnings call. I'm going to cover the financial highlights for the third quarter and then provide commentary on what has gone well through the first 3 quarters of this year, which has been a lot.

Jason will cover the quarterly financial results in detail. We had another strong quarter at EMCOR. We earned $6.57 in diluted earnings per share and generated revenues of $4.3 billion, which represents a 16.4% increase from the prior year period. We achieved an exceptional operating margin of 9.4% and had strong operating cash flow of $475.5 million.

For the third quarter, we had a book-to-bill of 1.16, with remaining performance obligations at a record $12.6 billion, which represents an increase of $2.8 billion year-over-year and $2.5 billion from December of 2004. We continue to allocate capital with discipline. For the first 9 months of 2025, we allocated just over $430 million on share repurchases and utilized $900 million for acquisitions. Our balance sheet remains strong and liquid, providing the fuel to support our growth and capital allocation strategy. So what's driving this outstanding performance in the first 3 quarters of 2025. Our Electrical and Mechanical Construction segments continue to earn impressive operating margins and generate growth in their base of business as demonstrated by increases in both revenue and RPOs across a number of key sectors.

We execute well for our customers in these segments by using VDC, BIM and prefabrication coupled with strong planning, excellent labor sourcing and management and disciplined contract negotiation and oversight. We have managed our project mix well and continue to gain the confidence of our customers across geographies and diverse market sectors. With respect to data centers, we continue to improve our capabilities to serve an increasing number of data center sites with multiple trades and across a diverse set of customers. As I have said before, we are known for having the best field leadership in the business, and they operate with focus, discipline, humility and grit.

Our Mechanical Services business in our U.S. Building Services segment continues to execute well with revenue growth of nearly 6% in the quarter and 7% year-to-date and an operating margin in the high single digits. The impact of the successful restructuring in our site-based businesses is reflected in this segment's third quarter operating margin expansion. Our Industrial Services segment had some demand headwinds during the year as some large turnarounds were moved into the fourth quarter or further into 2026. And lastly, we had a successful third quarter in our U.K.

Building Services segment. In September, we announced the sale of our U.K. business and believe that we will complete this transaction by year-end as we await U.K. regulatory approval. EMCOR U.K. has a very talented management team, and they will serve their new owners well, and we will miss them. Overall, we had another strong quarter and a robust performance year-to-date in 2025. Now I'm going to turn to the RPO section.

As I previously mentioned, we leave the quarter with a diverse and strong set of RPOs at $12.6 billion. Due to the growth in the majority of the sectors we serve, our RPOs have increased 29% year-over-year and 25% when compared to December of 2024. On a sequential basis, RPOs have increased 6% from June to September. Long-term secular trends across key sectors continue to support this growth. Driven by robust data center demand, RPOs within network and communications totaled a record $4.3 billion at the end of September, almost double that of the year ago period.

While acquisitions have added to our data center capabilities and allow us to serve our customers in additional geographies, over 80% of our RPO growth we have seen in this space during 2025 has been organic. Healthcare RPOs totaled $1.3 billion. While the health care sector has always been core to EMCOR, the acquisition of Miller Electric has expanded our opportunities in this sector, contributing to the nearly 7% RPO growth we experienced year-over-year. Manufacturing and industrial RPOs totaled $1.1 billion.

In addition to demand driven by customers' onshoring and reshoring initiatives, recent growth in this sector has also benefited from the award of certain food process projects within our Mechanical Construction segment as well as a renewable energy project within our Industrial Services segment. And led by our Mechanical Construction segment, water and wastewater RPOs increased by over $300 million during the quarter and now total $1 billion as we continue to win projects throughout Florida. Although RPOs within high-tech manufacturing have decreased from September of last year, we continue to believe in the long-term fundamentals of the sector, while acknowledging that award of these projects can be episodic in nature or impacted by our resource allocation decisions as we seek to deploy our workforce in a manner that achieves optimal outcomes for EMCOR and our shareholders.

With that, I will gladly turn the presentation over to Jason to cover our financial results in detail.

Thank you, Tony, and good morning, everyone. As Tony mentioned, over the next several slides, I will review the operating performance for each of our segments as well as some of the key financial data for the third quarter of 2025 as compared to the third quarter of 2024. I'll start on Slide 6, which is revenues. With growth of 16.4%, revenues of $4.3 billion set a new company record for a third quarter. Acquisitions contributed $306.6 million, with the largest incremental revenue coming from Miller Electric.

On an organic basis, revenues grew by 8.1%. We experienced growth within all of our reportable segments and demand for our services continues to be strong across most of the sectors that we serve. If we look at each of our segments, revenues of U.S. Electrical Construction were $1.29 billion, increasing 52.1% due to a combination of strong organic growth and the acquisition of Miller.

Consistent with our commentary over the last several quarters, while we continue to experience greater data center demand, growth within this segment remains broad-based as increased revenues were generated from nearly all market sectors. In addition to networking and Communications, where revenues grew by nearly 70% year-over-year, Electrical Construction saw notable growth in commercial, health care, institutional and transportation. This once again demonstrates the broad offerings of this segment. Revenues in Electrical Construction also benefited from higher levels of short duration projects and service work due in part to the capabilities we've added through the Miller acquisition.

Revenues of U.S. mechanical construction were a record $1.78 billion, up 7%, almost entirely through organic growth. Due to greater demand for data center construction projects, this segment saw the largest increase from the network and communications market sector, where quarterly revenues nearly doubled year-over-year. Beyond data centers, greater revenues were generated from several other market sectors with the most notable increase within manufacturing and industrial, led by food processing construction projects. Partially offsetting the revenue growth within mechanical construction were decreases within high-tech manufacturing as we completed certain semiconductor construction projects and commercial due to less warehousing and distribution project revenue.

While we are starting to see some resumption in demand from our e-commerce customers, we are just beginning to ramp up on these projects. On a combined basis, our Construction segment generated revenues of $3.1 billion, an increase of 22.2%. Looking next at U.S. Building Services, revenues of $813.9 million reflect a 2.1% increase year-over-year.

This marks the second quarter of revenue growth since the loss of the site-based contracts that we've previously referenced. Similar to the second quarter, the growth in Mechanical Services exceeded the revenue decline within site-based and driven by each of its service lines, our Mechanical Services division generated revenue growth of 5.8% in the quarter, all of which was organic. Turning to our Industrial Services segment. Revenues of $286.9 million are in line with that of the year ago period.

Decreased field services revenues as a result of the completion of a large renewable fuel project were offset by an increase in shop service revenues, primarily due to greater new build heat exchanger sales. And lastly, U.K. Building Services generated revenues of $136.2 million, which represents an increase of $29.8 million or 28.1%. While favorable exchange rate movements did positively impact the segment's revenues by $4.8 million, growth was largely driven by the award of recent facilities maintenance contracts by new customers and increased project activity with existing customers.

If we turn to Slide 7 for operating income, we generated a record third quarter operating income of $405.7 million and earned a very impressive 9.4% operating margin. Looking at each of our segments, U.S. Electrical Construction had operating income of $145.2 million, which represents a nearly 22% increase. As a result of the revenue growth I referenced, this segment experienced greater gross profit across the majority of the market sectors in which we operate, resulting in the increase in operating income.

While down from the unprecedented 14.1% earned in last year's third quarter, the segment's operating margin of 11.3% remains strong, reflecting the overall performance and execution by our companies. In addition to incremental intangible asset amortization, which reduced operating margin by 90 basis points, operating margin in the quarter was impacted by lower profitability on certain projects in new geographies where we encountered reduced labor productivity while investing in the development of our workforce. Operating income from U.S. Mechanical Construction of $229.3 million increased by 6.7%, in line with the growth in segment revenues, while operating margin of 12.9% is comparable year-over-year as we continue to execute well across our project portfolio.

Together, our Construction segments grew operating income by 12.1% and earned a combined operating margin of 12.2%. U.S. Building Services generated operating income of $59.4 million, an increase of 6.9% and expanded operating margin by 30 basis points to 7.3%. In addition to the increase in revenue, the operating performance of the segment benefited from a reduction in SG&A margin as we are beginning to see the impact of the restructuring we recently completed within our site-based business.

Moving to Industrial Services. Despite revenues which were relatively consistent year-over-year, operating income of this segment nearly doubled due in part to a more favorable mix given a greater percentage of higher-margin shop services work. And lastly, U.K. Building Services earned operating income of $7.6 million or 5.6% of revenues.

The increased profitability of the U.K. business was due to greater gross profit stemming from increased revenues, a more favorable project mix and effective cost management, which resulted from the leveraging of their overhead during a period of growth. If we move to Slide 8, I'll cover a few highlights not included on the previous slides. Gross profit of $835.3 million has increased by 13.7%, and our gross profit margin for the quarter was 19.4% SG&A of $429.6 million increased by $58.4 million, while our SG&A margin remained consistent year-over-year at 10% of revenues. Accounting for nearly 2/3 of the increase in SG&A was $32.2 million of incremental expenses from acquired companies and $5.7 million of incremental intangible asset amortization expense.

Excluding these items, SG&A grew by $20.5 million, largely due to employment costs as we continue to invest in headcount to support our organic growth, and we experienced some increased incentive compensation within certain of our segments given higher projected operating results. And finally, on this page, diluted earnings per share was $6.57 compared to $5.80, an increase of 13.3%. If we look briefly at Slide 9, this slide summarizes our results for the first 9 months of 2025. With year-to-date revenue growth of 15.5% and operating margin expansion of 20 basis points or 30 basis points when you exclude the impact of the transaction costs incurred earlier this year, our performance for the first 3 quarters set a number of new company records.

In a later slide, Tony will outline our updated earnings guidance for 2025. As I've done in the past, I mentioned that now as this guidance reflects continued strength in our margins. Specifically, at the low end, we have assumed a full year operating margin, which is equal to what we have earned year-to-date, while the high end reflects what we could achieve if we produce an operating margin in the fourth quarter equivalent to the record margin we earned in Q4 of last year. Let's move to Slide 10, which is our balance sheet. With cash on hand of $655 million and working capital of $878 million, our balance sheet as of September 30 remains strong and liquid, positioning us well to continue to deliver for our customers and shareholders.

Although not shown on the slide, during the quarter, we had operating cash flow of $475.5 million and have generated $778 million year-to-date. For the full year, we continue to estimate that operating cash flow will be at least equal to net income and approximately up to 80% of operating income. Given our strong operating cash flow during the quarter, we repaid the $250 million that was previously outstanding under our revolving credit facility. And before I turn the call back over to Tony, I just want to quickly look at Slide 11, which summarizes the pending divestiture of our U.K. business.

As Tony mentioned and we previously announced, we have entered into an agreement to sell EMCOR U.K. for approximately $255 million. This transaction, which we anticipate will close prior to the end of the year, sharpens our focus on core end markets throughout the United States while supporting our balanced capital allocation strategy. Proceeds will be used to pursue further organic growth and strategic M&A with a focus on electrical and mechanical construction as well as mechanical services while also returning capital to our shareholders. Due to the size of the U.K. business, this transaction will not be treated as discontinued operations.

And as a result, we will retain the revenue and earnings that have been generated by the business through the close of the transaction. Therefore, while EMCOR U.K. currently provides us with approximately $500 million of annual revenue and $0.45 of diluted EPS, the impact in the current year will be limited to the portion of 2025 that we no longer own the business. This has been reflected in the updated earnings guidance, which Tony will share with you. And when providing our Q4 results, we will adjust for transaction expenses and any gain from sale as those items are excluded from our guidance.

With that, I will turn the call back over to Tony.

Thanks, Jason. We've been executing very well. And as a result, we will tighten our 2025 revenue and earnings per share guidance. Specifically, we're updating our full year 2025 revenue guidance to a range of $16.7 billion to $16.8 billion from a previous range of $16.4 billion to $16.9 billion.

This reflects the momentum we have seen in the business while adjusting for the anticipated sale of the U.K. segment. We are also narrowing our guidance for non-GAAP diluted earnings per share to a range of $25 to $25.75, reflecting an increase of $0.50 at the low end and $0.25 at the midpoint. In order to continue to earn strong operating margins, we will need to continue to execute with discipline and efficiency for our customers. I always remind our investors that this is not a quarter-to-quarter business with respect to operating margins and the past 4 to 8 quarters on average reflect the underlying margins in our business.

There remains momentum and demand in key sectors, especially in data centers, traditional and high-tech manufacturing, health care, water and wastewater, HVAC service, building controls and retrofit projects. Macroeconomic uncertainty always exists, especially around tariffs, trade and now we have the government shutdown again. But we believe our guidance reflects the potential impact of such uncertainty as we view it today. We will remain disciplined capital and resource allocators.

Our strong balance sheet bolsters our ability to execute a healthy pipeline of acquisitions and also robust opportunities to invest in our organic growth and return of cash to shareholders through dividends and share repurchases. When we talk about resource allocation, we work to maximize our opportunities across the right sectors, customers, contracts and geographies. Our resources, that is our supervision, our virtual design and construct or VDC capability, prefab and as important as anything, our subsidiary and segment leadership's time, attention and focus as they are ultimately the quarterbacks that direct this allocation.

We think about that across all those sectors, customers, contracts and geographies. Last night, we signed an agreement to acquire the John W. Danforth Company based in Buffalo, New York, with operations across Upstate New York and Ohio. Danforth is a mechanical construction company with expertise in data centers, health care, industrial, manufacturing and commercial.

They also have excellent VDC and prefab capabilities. Danforth should add about $350 million to $400 million in revenues with solid steady-state margins. However, in the first year, those margins will be reduced to backlog amortization. The transaction is expected to close in the fourth quarter, subject to customary closing conditions.

They are a great team. They have a great cultural fit with us, and we have worked together successfully in the past. We do look forward to much success together, and we look forward to soon welcoming the Danforth team to our EMCOR team. And I'm going to close with what's probably the most important statement that I make at every call.

I want to thank my EMCOR teammates. Thank you for your dedication to EMCOR and our customers. Thank you for living our values every day. Thank you for taking care of one another and keeping each other safe.

And thank you for the outstanding results you continue to produce for our shareholders. And with that, I will take questions.

[Operator Instructions] And today's first question comes from Brent Thielman with D.A. Davidson.

Tony, maybe just to build upon some of your comments and the concluding statement there. Obviously, I think maybe somewhat -- folks somewhat surprised by the margin profile this quarter. I think to your point, this is -- it's a construction business. You have impacts from mix and other factors in any quarter.

And maybe, Tony, can you build on the margins that you're seeing on new work? Are they attractive relative to what we see reported here? Just an opportunity to address those concerns here.

This is some of the strongest overall operating margins we've had in a quarter. We knew we were going to have amortization headwind in the Electrical segment. And without the amortization headwind or the investment in new markets, reality is we're 14% plus in Electrical. Mechanical margins are very strong.

Building Services margins are strong. Jason, I think year-to-date, these are the best margins we've ever had on a year-to-date basis.

And I think the thing that I go back to, Tony, is we've said over time, right, a rolling 12- to 24-month average is where we expect our margins to be. Those margins would be somewhere between 9.1% and 9.4%. And on a consolidated basis, we delivered 9.4% in the quarter. And when you look at where we were as we exited Q2, we said for full year, our margins would be between 9% and 9.4%, and we delivered at 9.4% in the quarter.

So I think we're delivering the margins that we anticipated.

Yes. And what the business does. I mean, yes, it bounces around a little bit. But you don't buy something the size of Miller with the amount of backlog amortization we're going to go through RPO amortization we're going to go through and be able to keep margins at the levels they were.

I mean it's just -- that's not we did that when we gave our guidance for the year. So I'm a little befuddled about some of the margin reaction to be straight with you.

Yes. Understood. I guess a separate question, nearly a double, if not more, in data center RPOs. I think folks understand that's a pretty good market. Maybe if you could just touch on maybe some of the other sectors and maybe what areas are surprising you in terms of relative strength or maybe even getting stronger that you'd point out outside of data centers?

Yes. I mean I think you hit on a really important question, Brent. I mean we have a broad base of business outside of data centers that's pretty successful. And I think a really good marker, and I always think about this in our business broadly, is what goes on in the mechanical service business, which grew mid-single digits, has strong operating margins and almost has no data center exposure.

I think I have this right. 7 of our 10 mechanical segments had growth and 10 of our electrical market sectors and 10 of our 11 electrical market sectors had growth. We're seeing strong growth on the mechanical side in water and wastewater. We continue to see strong demand in health care in both sectors, really. And the addition of Miller really bolsters our health care exposure on the electrical side in some of the fastest-growing health care markets in the country of which they're exposed to.

We continue to see good opportunities in traditional manufacturing, especially for us in food processing. It's one of the few things we do on a large-scale EPC, and we do it very well out of our Shambaugh subsidiary in Fort Wayne, Indiana. We continue to see pretty good demand in traditional retrofit commercial. It's a strong market for us, especially with an eye towards energy efficiency and the restacking of buildings that continues to go on.

I think high-tech manufacturing, that's a choice. We have very strong demand in parts of the country, and we're executing very well. In other parts of the country, it's a little lumpier or we may rededicate those resources, quite frankly, to more data center work versus slog through another semiconductor plant in parts of the country. We did very well on it.

It's just a very difficult customer set and application in one particular case. So when you put it all together, demand is broad-based. It's strong. We like having diverse demand.

We're going to continue to pursue diverse demand. And I think that's good news for our shareholders for the long term, and we're not giving up anything on the data center side by doing that. As you said, with the size and...

Next question from Adam Thalhimer with Thompson Davis.

The organic expansions you talked about that impact of the Electrical segment, Tony, can you just talk about the investments you're making, how long that headwind might persist and what the benefit?

I think typically, Adam, it's a 1- or 2-quarter headwind as we start up the job. And it's a margin investment is what it is. It's not really a capital investment upfront. It's a margin investment as we have to go through the learning curve of building a labor force.

And sometimes that takes a little longer. Sometimes we get it right at the beginning of a new market. And sometimes it takes us further into the job to get it right. And we do that all the time.

And we only call that out, I think, to make investors aware that it's not a linear line when you expand from what was 3 or 4 data center markets in 2019 serving to over 16 today electrically and from 1 or 2 mechanically to over 6 today mechanically. That's not a linear straight line. We have yet to not do it successfully. And it's just more of a pointing out that, hey, that's part of how we grow the business and it's part of what we almost look at it as R&D to go into a new market.

Yes. And I think there's a combination of things that we expect to happen as we move forward, right? We'll build that labor force -- we'll get that efficiency. We'll inherently become more productive as we do the next phases of these contracts, and we'll learn some lessons here and we'll price our jobs to that market.

So it's a number of things that we think kind of improve as you go from the first set of jobs to those next levels.

It's an ongoing headwind always in the numbers. This was a little more if it was a little bigger site.

Okay. Well, I think -- I mean you left the prospect of flat Q4 margins in the guidance, which I thought was interesting. Just curious how you might get to the high end of the Q4 margin guide.

I think it's just project timing. I mean, at this point, I mean, there's really nothing new. And then we'll have -- depending on when Danforth close, it's not going to really add anything, but we'll have revenue coming in without a lot of margin because of the headwind of the backlog amortization. We're still running off the Miller backlog amortization.

I think those are the kinds of things. Operating-wise, we expect to operate pretty well in the field.

And the next question comes from Brian Brophy with Stifel.

Just wanted to -- following up on the geographic investments. Just wanted to see if you could help us quantify, I guess, the impact. I think some of the numbers you gave, my back of the envelope math suggests 200, maybe 250 basis point impact to margin in the quarter. Am I in the ballpark there?

Yes. I think I'll give you dollars and we can work that into margins. I mean if we look at the jobs that drove it, it's probably about $13 million or so.

Okay. Okay. That's helpful. And then -- appreciate all the commentary on the U.K. business. Curious how you guys are feeling about the business portfolio after this transaction closes? Is there anything else you guys would consider noncore? Or how are you thinking about the portfolio at this point?

We look at our portfolio all the time. And portfolio actions to the size of the U.K. Look, we're making portfolio adjustments all the time in our mechanical and electrical construction business and even mechanical services. One of those portfolio adjustments we just talked about.

We invested in a series of projects in a geographic market or 2 to gain scale in that market as a $13 million investment. You all don't think about that as a portfolio action. It was a little larger in this quarter, but it major metro areas in this country, we have no interest participating on the electrical side in the traffic market anymore. And we've been slowly winding that down across a number of markets.

So those kinds of things that we call routine course of business, the ins and outs, opening a new -- couple of new branch offices in the mechanical service business, either through a small asset purchase of some guys' tools and trucks or which there's one move in one way that we announced, and there's one moving the other way, right? The U.K. is out, John W. Danforth is in. The U.K., really, it's a success story.

For people that have followed us over a long period of time, know that, wow, we turn something into something very successful with a great team. And it was the right time to exit for our shareholders really for that team and for that business. It wasn't going to be a place that we -- because of all the other opportunities we have, it wasn't going to be a place that we were going to allocate a lot of capital to grow. Like, for example, we weren't going to take the U.K. platform and grow through the rest of Europe to build a facility services business.

That's not something we were going to do. And it's probably something that needed to happen to continue the growth in that business. John W. Danforth is another decision, right?

Someone we knew, someone we've known very well in a market that's steady, in a market where they have a leadership position with a group of people that we have worked with before. They got some interesting capabilities in BIM, VDC, prefabrication. And those capabilities have -- they work in the data center space, they work in the heavy industrial space. They work in the health care space, and they execute those projects very well.

So not a one-for-one as far as exchange, but it's the kind of thing, midsized mechanical construction acquisition in I think. And we have balance sheet capability to do both without selling the U.K., but it was the right time. If you look at other parts of our portfolio, we examined it all the time. And we're probably headed towards is how do we think about the rest of our site-based business, which is pretty integrated into our Building Services business.

It's on the improvement trend. And then we have the Industrial Services business, which has had a tough couple of years. That being said, some of the things we do there, some of the prospects we have, we think we can improve it. And I always say these things this way.

Deals happen both ways when they happen, and there's a timing that's right. And right now, we think we have a good portfolio that we're executing on. It still has upside across all the businesses that we're operating in.

The next question is from Justin Hauke with Baird.

Great. Yes, I guess maybe I was going to build on that last question just on capital allocation. And obviously, you did the Danforth after the quarter on a good cash flow quarter and you've got the proceeds coming in from the U.K. But should there be any read or do you want to make any comments about just the lack of buybacks in the quarter?

Is that signaling that there's other kind of pending transactions that are out there that maybe are closer to coming than not or anything about just -- usually, your buybacks are pretty predictable quarter-to-quarter.

Yes. We -- yes and no. We did a greater amount than we typically would do in the first part of the year, and most of that executed off of a 10b5-1 -- we're not really traders in our stock. There was a bit of a dislocation in the 10b5-1 picked it up in the second quarter.

That being said, we're not capital constrained. We'll be balanced capital allocators over a long period of time. If you go to the end of my remarks, we look at all uses of capital from organic investment. And it's interesting.

We were thinking about what we've added this year or we'll add by the end of the year. We'll add about 400,000 square feet, give or take of prefabrication space and our ability to prefabricate some call it modular construction, maybe it's the next step down, which for the most part, we do for our jobs. And we do that across our fire life safety business. We do that in our electrical business, and we do that in our mechanical business.

And Danforth adds to that capability. They have a very well-run, very modern shop, and it's one of the attractions they had with us in a pretty good labor market. So we don't have capital constraints. There's not a lot of timing going on unless there's a big dislocation.

And I wouldn't consider today a big dislocation. We ran up in a week and we came right back to where we were. And we think we're performing well. Our cash flow is good.

We're going to keep a strong and liquid balance sheet. And I think what you see on the last page of our presentation, you take a 6-year trend, I think the next 6 years will look very similar to the last 6 years.

The next question comes from Avi Jaroslawicz with UBS.

So I noticed that organic growth has been running around mid- to upper single digits the last few quarters. Are you thinking that should be picking up at all in the near term just based on some of the backlog growth that you're seeing? Or does this seem like a more comfortable rate for the foreseeable future?

Look, I think high single digits, low double digits is probably a comfortable rate. I mean, the reality, right, we're a big company and the law of large numbers start to take over. You think about what we have to add from an organic -- to say we're growing 10% organically and take our guidance, that means we added between $1.5 billion and $2 billion of revenue organically in a year. That's pretty darn good and still maintain the cash flow characteristics we have and the margin profile we have.

And Jason, I think that's probably not a bad way to look at it.

I agree with that, Tony. Especially when you look -- I would look at the RPO growth sequentially, right, we're growing 5%, 6% sequentially. I think that gives you a little bit more of a tell for the future. The other thing, too, is if you look at our RPO and you look at how much of it will burn in excess of 12 months, right now, I think it's about 20% or so will burn greater than a year.

And if you look historically, that number was typically about 15%. So some of the work we're booking now is a little bit longer term, which I think impacts just the turn of that RPO.

Yes. And if you think about it, we had some really good growth markets. I think if you look at our data center business, I think that's going to grow high teens to mid-20s for a while. And if you look at any forecast out there, right, cloud storage, data centers are going to grow high single digits to low teens. and AI growth, depending on who you look at, we've looked at many, and we've -- remember, we're actually connected all the way back through our customers and their capital spending plan.

AI data centers are going to grow 20% plus. And that's going to become an increasing part of our business, and that will be by design, but we're not going to neglect our traditional business. And if you look long term, right, we've grown in excess of non-res in our construction businesses. 500 basis points.

Over a 5-year period.

Over a 5-year period. That's probably a pretty good marker. And it may go a little more than that because of the data center concentration, but maybe that picks up another 100 basis points. I mean these are long-term projections.

But I think high single digits organic, maybe pick a couple of more points up through acquisition is how we think about the business over a long term and how we have thought about it over a long period of time in our planning.

Okay. I appreciate that perspective. And then if I could just ask a follow-up in terms of some of the cost of growth that you've been seeing, just with growth having been relatively steady just on the organic side, can you share some more color as to what made this maybe more unique than past situations? You've been growing at a pretty nice clip over the last couple of years.

And similarly, have we had any periods where there have been a similar type of level of these start-up inefficiencies in the Mechanical Construction segment?

They show up, yes. And the only reason we called it out this quarter is a little more than usual. This happens just about every quarter, and you can see it in our [indiscernible] disclosure in the [indiscernible] . That's where most of that rests.

This was a little more, a little tougher market, a little tougher job building the labor force. And really, it's still a profitable job. I mean I want everybody to think that we invested into a wash job. That's not what happened here.

This is classic revenue recognition thing, right? The margin came down versus what we expected. And like Jason said, we probably were a little more optimistic than we needed to be as we entered that new market because, quite frankly, if you looked at the customer and what we thought we were going to be doing and the speed with which is going to happen, we'd work from other markets before, and we had a different experience, and we had a more experienced workforce.

Our next question is from Sam Kusswurm with William Blair.

I guess to start, looking at your network and communications end market, it looked like revenue was flat sequentially for total U.S. construction. Just given the rapid sequential growth we've seen in the last few quarters, I think some investors may have found that surprising. Can you talk about what caused that pacing to slow? I think you just mentioned that you think we're going to market.

Can you repeat that question for me because we're not seeing that same data point. I just want to make sure I understand the question. You're saying revenue in Network and Communications is flat for construction?

For total U.S. construction sequentially.

Yes. Year-over-year was growing. Sequentially, I think it's just project timing. I mean, I think year-over-year, we're up tremendously, right? We're probably up almost 80%. I think electrical is up 70%. Mechanical is nearly double. I think it's up 90% or so. Sequentially, I wouldn't really look at this business one quarter to the next and look for...

And RPOs are up almost double, right?

In the quarter, at least 50% of our RPO growth came from network and Communications.

Yes. So yes, we're not -- said simply, we're not seeing any slowing in the market. There's a lot of project timing. I mean you can tell by our surprise that we think it's an area of great strength for us, and it's going to continue to grow.

Got it. Okay. That's helpful. Maybe just sticking with the data center theme though. Maybe you could just update us on the footprint of your mechanical business. I think last we spoke, you had been in about 5 markets today, but you were thinking of maybe taking that up to kind of the electrical business, 15 markets. How should we think about that as you think about the next year?

We will add 1 to 2 mechanical markets over the next year. The difference between mechanical and electrical is the mechanical, you're -- I would say it takes a little more to build the workforce that you're going to put into that market, and you really, really have to think about your prefab plan as you go into that mechanical market. So there's a level of investment you have to make on prefabrication and VDC that's a little more mechanical to support the next market you move into. So I think we'll grow by another 2 markets or so over the next year, maybe more than that with the acquisition of Danforth.

And then I think we'll -- electrically, we'll probably add 1 or 2 markets also at least, maybe more. When you talk about markets, it's also important to think about once you get on some of these sites, that can be a 5-year build. And so we're doing the first building on some of these places, it would be a 5-year build. And a lot of times, you can have 1, 2 or 3 EMCOR companies on the site.

And the thing that gets lost in this, I'm not -- I can't even count the number of fire protection sites we're on. In our fire life safety business, we're probably serving 70% of the data center sites in one way or another around the country.

The next question is from Sangita Jain with KeyBanc Capital Markets.

So I appreciate the color on the RPOs in Network and Communications. Can you just elaborate if you're seeing potentially larger individual bookings in this segment or if there's any change in terms of how these contracts are coming through?

The answer is yes and yes with a caveat. Some of the contracts also will be larger, but they'll be in a contract type called GMP, where we only book a portion of that work over time because they let out the next phase, even though we know we have the whole thing, which may distinguish us from other people. Again, at EMCOR in RPOs is only contracted work. And that includes places where we may have $30 million in RPOs, but we know we're going to do $100 million of work.

And so we've been relatively consistent with that. But in general, they're getting larger, I think, is a fair comment. The project size is getting larger, and that's a combination of larger call it storage sites and larger AI sites for sure, with more content, especially mechanically.

And then are you booking further and further -- like earlier and earlier for projects that may not start, let's say, for a few quarters?

No. We know we're probably going to get those projects. But again, which differentiates EMCOR from some other people in our sector, our space, is even though we're pretty sure we're going to get the next 5 buildings until that next data center is let, it's not in our RPOs, even though it's like an 80%, 90% probability we're going to get it.

Yes. And if you're looking at the growth in RPOs greater than a year, it's not data centers that's driving that. It's some of the other work we do, particularly in the water and wastewater. Yes.

Okay. That's helpful. And then is there anything in your guide '25 guide for the acquisition that you just referenced?

No, that will be -- any impact they have for '25 will be immaterial, maybe a little bit on the revenue side, but we don't know exactly when we'll close. And then you have to offset that versus when the U.K. will close. We think we called it about right. if the U.K. closes later and this one closes earlier, maybe we go towards the higher -- the top end of that guide more comfortably.

Yes. And on the bottom line, right, if you just think EPS, just because of the backlog amortization, and we typically say this, the impact is negligible in that first, let's say, 12 months or so just because of the backlog amortization. So certainly, for the fourth quarter, impact on EPS of the acquisition should be minimal.

De minimis, yes.

And the next question is from Adam Bubes with Goldman Sachs.

I think your hours per employee has moved up steadily higher over the last few years. Can you just talk about how much more runway you have to increase utilization, both from an hour per employee basis and then in terms of just productivity?

Well, I think we're going to continue to drive productivity. Again, because of project mix and like we do with more water and wastewater coming in, that is even more different because of some of the subcontractor work we do. I think in general, right, if you look at it, at a minimum, I think we're going to continue to drive at least 3% to 5% better because we got to a pretty good place of productivity. But I think it will be higher than that.

Go back to that discussion we just had about our shop investments. We're doing -- our man hours are growing less than our revenues, and we expect that man hours to continue to grow 1/3 to half as much as revenues will grow. And in most of our revenues, this is what's interesting, right? At one time, -- and if you go back 5 or 6 years, we would have had much more equipment in those revenue numbers.

And if you take most of this data center work or high-tech manufacturing work we're doing, even some health care work, we're not really buying the major components, and most of that was driven by supply chain. The difficulties around supply chain post-COVID and extended lead times, the owners or the owners through the CM's general contracts, but mainly the owners are buying that equipment now and then sending it to us for a handling fee. So the revenue growth would even be more. And so the productivity we're getting and the ability to grow hours at 1/3 to half the rate of revenues is even more impressive if you look over the last 3 to 5 years versus if you took a 10-year view.

Jason, you have anything to add?

Yes. We've talked about it before, right? If you look over a 5-year period, revenue is growing basically 3x what our headcount is growing. I think Tony touched on the productivity tools and the investments in prefab. I think the other thing impacting that, too, is project sizes, right? As project sizes scale up, you inherently get more utilization, and we're benefit.

Well, especially if your indirect. Yes.

Got it. And then your data center business has grown at a really impressive high double-digit rate. The backlog would support sort of continued double-digit growth. Can you just take us under the hood and help us think how you're able to allocate resources so efficiently and how quick, quickly you'll be able to move labor around from here?

What's sort of the sustainable rate of growth that we should be underwriting in that business?

Look, I think if you heard what I just said earlier, and I think you're probably, Adam, looking at the same market forecast we are and compiling them all and trying to get a view. Cloud storage is going to go 9%, 10% is what most people think over the next 5 years. And AI, depending on which ones you look at, are in excess of 20%, 25%. So if you blend that out, we're doing both.

There's no reason for us not to believe it's not a quarter-to-quarter business. We continue to look annually year-over-year. I don't know, mid-teens to low 20s depending on the year or the quarter. Eventually, you get into the law of large numbers there, too.

But sustainably, I think the good news is we're penetrated with the right customer. I'll share an anecdote with all of you because I think it's really constructive. We are a large data center builder that our customers value. And we just pulled together our 80 top people or so in the data center business.

And we actually did it Don at Miller and they hosted it. And first of all, it's a really impressive group of people that really know the business and know the customers. And what we talked about on our side were means and methods on how to drive productivity and contract terms and the things we're seeing that can lead to better outcomes for not only EMCOR, our shareholders, but also the customer. But what was different about this meeting, and I've been doing this for a little while, is -- and I'm not going to get into names, 3 of the top 4 actual end use, the actual end result in capital and the other 2 wanted to come in, but the schedules wouldn't allow and they've since done conference calls on these, where the direct owners wanted to come in and make sure that we understood what they had planned and how much they wanted us to be part of those plans going forward.

And so this is looking right through the general contractors and construction managers who are ultimately who write our checks and are very important customers for ours and partners. But the end user, the big hyperscalers and wanted us to know how important and share their plans with us on a proprietary basis. And I'm not going to share all those plans, obviously, because it was on a confidential proprietary basis. But to be able to pull our team together like that, to be able to talk about how we get better, to be able to talk very specifically around means and methods and labor productivity and couple that with our customers sharing their outlook of their capital spending, that led me obviously more positive than negative by log shot on what data center build looks like over the next 5 years. that data center build.

And at this time, we are showing no further questioners in the queue, and this does conclude today's question-and-answer session. I would now like to turn the conference back over to Tony Guzzi for any closing remarks.

So look, we'll see a couple of you and we'll see some of the more investors as we're out and about with conferences here in November and December. But for the rest of you, this will be the premature happy Thanksgiving and have a great end of the year and happy holidays and all those things. And for those of you that enjoy Halloween, enjoy Halloween tomorrow. Mostly, that should be people with little kids.

After that, it's not that much fun. That's my view. But no, thank you all and to my EMCOR colleagues. Stay safe, and we look forward to seeing you all about.

Today's conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.