In the wake of September 11, the need for both has never been higher.
When Frank MacInnis took the job in 1994 as chief executive officer of JWP (originally Jamaica Water Properties), the company had just filed for Chapter 11 protection.
JWP’s previous management had made the classic mistake of diversifying too far afield and too fast. Between 1986 and 1992 it acquired more than 100 companies, including a computer resale business. By late 1993 it was suffering from an acute case of acquisition indigestion and a crushing load of debt. Bankruptcy followed.
Enter MacInnis, now 55. The Canada-born, 25-year veteran of the construction industry had spent much of his career in the oil and gas end, overseeing projects in the Middle East, England and Oklahoma. He had founded a company that pioneered horizontal directional drilling, which allows easier access to hard-to-reach oil reservoirs, and had recently quit as chairman of Comstock Group, a competitor of JWP’s in the construction segment of its business.
A massive restructuring of a company in bankruptcy was the challenge MacInnis was looking for. Over the next year, he sold off dozens of companies, including the computer reseller and the parent company, JWP, itself. He renamed what remained Emcor Group and focused on electrical and mechanical construction and the design and installation of facilities like air-conditioning and fire control systems. To protect Emcor from this cyclical mix of businesses, he added facilities management to produce a continuing stream of income after the construction phase of a project ended.
The result of this focus has been remarkable. Since the Norwalk, Connecticut- based Emcor emerged from Chapter 11 in December 1994, it has reeled off 27 straight quarters in which income has exceeded that of the same quarter of the previous year. Recently trading at about $39, the company’s share price has risen more than 60 percent in the past 12 months, even as the Standard & Poor’s 500 index has fallen roughly 20 percent. Alex Rygiel of Arlington, Virginia-based Friedman, Billings, Ramsey & Co. estimates earnings will rise 15 percent, to $3.40 a share, on a 6 percent increase in revenue, to $3.65 billion. That is just 11.5 times earnings, even though the company has no debt and $175 million in cash.
As uncomfortable as he is saying so, MacInnis admits the tragic events of September 11 will increase business. He discussed Emcor’s prospects with Staff Writer Justin Schack.
Institutional Investor: How will the September 11 attacks affect Emcor?
MacInnis: We lost five people ourselves. The immediate impact is that there are numerous companies that were displaced and require urgent assistance to find, upgrade, refit and remodel new space to move into, either permanently or temporarily. We’re doing a lot of that. We’re involved in the Lehman Brothers move into Midtown, for example. There are a number of companies moving into Connecticut, Westchester County, New York, and New Jersey. We’re involved with a number of moves like that.
Long term, there will be a lot of reconstructions, of course, of both the commercial and public infrastructure downtown - not only office buildings but the Con Edison substations, electrical distribution cables, the subway.
The other macro trend is that we’re seeing a lot of questions from customers, old and new, about security-related issues: not only physical security but also the integrity of air handling, filtration and water treatment systems. Since our business is associated with all of those systems, I think it is positive for us.
Stepping back, why was the old JWP in such terrible straits?
JWP was the first consolidator of our industry. It took advantage of easy credit terms and a buoyant market to accumulate more than 100 subsidiaries. The company laterally diversified into other areas, including the Businessland chain of computer reselling stores. And that, in retrospect, was the straw that broke the back of the company. JWP made two basic errors. First, paying too much for acquisitions and taking on too much debt. Second, failing to effectively and quickly consolidate those acquisitions. I was hired about a month after the Chapter 11 filing to lead the company through reorganization, and we were successful in doing that in late 1994.
How hard was it to do?
I don’t know of a larger service company that’s ever survived Chapter 11 reorganization. The financial assets of a service organization consist predominantly of their accounts receivable, and those tend to decline in quality very quickly in a bankruptcy situation. So it’s necessary to proceed through reorganization extremely quickly or not at all.
The major disposition was Jamaica Water Properties, the water distribution company that was the original core of the company. A decision was made that the core business was electrical contracting and facilities management. The reorganization and the elimination of most of the debt left us with quality companies, and we’ve taken advantage of that.
Do you manufacture the systems that you design and install?
No, we don’t. We design and install and maintain the systems that create facility environments - the specialized types of lighting, the air handling, the heating, cooling and filtration of the air, all of the electrical systems, the electronics in the room, the security and the safety systems, the sprinkler system and the like. If the systems don’t work or work poorly, it doesn’t matter how solid the walls are - it’s still a poor facility.
If you want to improve the performance of an outmoded facility, you don’t have to knock down the walls; you just have to redo the systems. That is one of the reasons why more than half of our business is refurbishment of an existing facility, and then its operation and management for the owner and user.
How have you diversified the risks of a cyclical business?
We have the ability to move quickly and efficiently from one area of market demand to another. A real good example of that is the telecommunications business, where we were directly and heavily involved in the very fast-paced development of telecommunications infrastructure. That market began to disappear about midway through 2000, at the same time that the efficiency and the availability of electrical energy generation and distribution became a major concern. We were able, because of the diversity of our services and our geographic spread, to come to the aid of energy consumers and energy suppliers.
Energy has become a variable cost, with the disappearance of regulation of energy prices. One of the major roles that we play is the redesign, retrofit and operation management of energy-efficient facilities. And that is one of the prime benefits of our unique ability to perform both construction and facility management. Our construction relationship creates the opportunity to obtain the facility management relationship. So it’s a circular business in that one part of our skill set begets continuity for the other part.
Something like 20 percent of your revenue now comes from facilities management. Are you trying to boost that?
Oh, very much so. One of the observations that I made early on was that in our U.K. operations our British company was losing money year after year in construction. But the facility management side of their business was not only profitable but growing both in size and profitability year after year. And we said, “Huh. I wonder if by any chance this is the legendary hedge against the cyclicality of the construction business.”
We decided that we would try to replicate this balance between facility management and construction in our U.S. operations. At that time, large scale, organized facility management did not even exist in the U.S. The real leap was in 1998, when we established a special purpose entity with CB Richard Ellis, the world’s largest seller, broker and manager of real estate, to take on a significant portion of their portfolio of commercial buildings in the U.S. The overall high-grade commercial investor property under management at Emcor Group is now over $700 million in revenues.
How about the international business?
Our international operations are concentrated in the U.K. Our best-known facility service project remains at Heathrow Airport. Outside of the U.K., including Western Europe, we’re much more careful. Our operations in the Emirates, Saudi Arabia, South Africa and Hong Kong have always been performed by joint ventures in which we typically own a 50 percent stake and in which our partner is an actual risk-taker. The North American market - notably Canada, where we are the largest of our kind, and the American market - gives us plenty of growth opportunities.
Your stock is rather low, even now.
We’re not given adequate credit, either for our past consistency or the diversity of our services. We do not get enough credit for the professionalism of our management and the conservatism of our balance sheet. We are essentially debt free.
