Revenues plunged for more than half of the electrical contractors on Electrical Construction & Maintenance's (EC&M) fourth annual Top 50 Electrical Contractors listing. The firms averaged an 8 percent drop in sales from 2001 to 2002, compared to a 7.25 percent increase experienced by the Top 50 from 2000 to 2001 and a 27.7 percent increase from 1999 to 2000.
The marketplace can change quickly in the construction business. In the late '90s electrical construction companies had more work than they could handle and faced a severe skilled labor shortage. Now, more electrical contracting firms are competing for fewer jobs, leading to low margins and increased unemployment.
“There are less jobs to bid, and the competition is starving for work,” says Louis Kinman II, vice president of operations for Kansas City, Mo.-based Capital Electric Construction Co. Inc., an electrical contractor that specializes in substation, transmission line, distribution, street lighting, and traffic signal work. “We are finding that in order to keep people working right now, we're having to look at smaller projects, which means more competition.”
Kinman, a 35-year electrical industry veteran, says his company's sales increased 10 percent despite the tough economic conditions.
But this wasn't the case for many others. Wayne Griffin, president of Holliston, Mass.-based Wayne J. Griffin Electric, attributes the sharp drop in many contractors' sales to the overbuilding of hotels, high-tech facilities, and speculative office buildings during the construction boom. High-profile, high-dollar project opportunities are now in short supply, and many electrical contractors are returning to their bread-and-butter markets like education, residential and health care.
With more contractors expanding into new market segments and less projects on the horizon, the number of bidders has dramatically increased on individual projects. More than half of the respondents to this year's survey named competitive bidding as their top challenge for the coming year, followed closely by the slow economy. Companies less experienced in certain market segments often submit low bids and then lack the expertise or the manpower to successfully complete the job. Griffin says this bidding practice hurts rather than helps the industry.
“The contractors pursuing those jobs may have the financial or bonding capacity, but they don't have a proven path of doing that type of work,” he says. “If they haven't participated in that type of construction before, they can't factor the degree of difficulty into their estimates.”
Many electrical contractors are now taking jobs at or below cost to keep their businesses alive, says Jim Driscoll, president of Patrick Power Corp. in Fort Lauderdale, Fla. Driscoll says the current lull in construction reminds him of the early '80s, when many construction companies struggled to survive.
“Everyone was dying in the construction business, but no one would admit it,” he says. “The contractors either took work too cheap or couldn't cover their overhead. A lot of them went broke or disappeared.”
Electrical consolidators unravel in down economy
Two of the nation's largest electrical consolidators — Encompass Services Corp. and Bracknell Corp. — are noticeably absent from this year's listing.
Encompass, which ranked second on last year's listing $1.6 billion in revenues, filed for Chapter 11 bankruptcy protection on Oct. 14, 2002. A few months later, it sold 37 of its more than 300 operating units for about $163 million. The businesses were either sold back to the original owners, acquired by Integrated Electrical Services, or liquidated. A financial sponsor now owns the residential part of the company, which was the best performing group prior to the bankruptcy. Residential Services Group Inc. purchased the assets for about $40 million plus certain related liabilities.
Joel Levington, director of Standard and Poor's, says Encompass started out as a leveraged company but then began accumulating a large amount of debt on its balance sheet. By second quarter 2002, the company posted a net loss of more than $457 million, and had a total debt of about $931 million. The electrical, mechanical, and janitorial company also practiced poor bidding disciplines, experienced project overruns, and showed signs of weakness in its internal controls, he says.
“As these operational issues started to take place, combined with the downturn in commercial construction, their earnings kept getting weaker and weaker and they continued to miss their expectations to the public,” Levington says. “Eventually, the banks just decided not to work with them anymore.”
Levington says Encompass focused on growing its business rather than developing a well-run construction company by acquiring $5 million and $10 million companies to boost its bottom line. He claims the company would have benefited from a better business model that ensured its existing bidding disciplines, field operations, and internal controls were solid before growing the business.
The consolidator isn't alone. Other electrical contracting firms have faced similar financial problems. Bracknell Corp., a Minneapolis-based company with 2001 sales of $377 million, was declared in default of credit agreements in 2001. All of its directors and officers then resigned their positions, and Bracknell's subsidiary, Adesta Communications, filed for bankruptcy protection.
Acquisition activity has also slowed in other sectors. Comfort Systems U.S.A., which was once a large rollup, divested a large portion of its assets to EMCOR Group. EMCOR, which ranks second on EC&M's listing with 2002 sales of $1.19 billion, is now focusing more on its facilities business than buying additional mechanical or electrical contracting firms.
Levington says the number of consolidators has dwindled, if not completely disappeared. “A business model that's based on just rapid growth tends to forget that how construction companies make money is really in risk management,” he says.
Weathering the storm
While some of the top electrical contracting consolidators have crumbled under financial burdens, several electrical contractors on EC&M's listing have survived the tumultuous times in the construction industry. Patrick Power Corp. is now moving into its third generation of leadership after 43 years in the business, and last year, Guarantee Electrical Co., St. Louis, celebrated its 100th anniversary.
Jim Driscoll, Patrick Power's president, says that if an electrical contracting firm wants to stay afloat, it needs to keep up with technology, diversify its market segments, and branch out to new locations in the United States and overseas. Patrick Power Corp., which is one of the top five steel-mill contractors in the United States, recently completed a $160 million project in Saudi Arabia and a $20 million, 1,400-room hotel in the Bahamas. The company started to pursue offshore construction jobs when its three prime markets — petrochemical, steel work, and power plants — dried up.
“If you don't change with the times, you're not going to be around in five years,” Driscoll says. “I think there are a lot of companies in trouble today that are good, fine companies that couldn't make the change or didn't know how.”
To weather the storm, contractors need to develop and maintain a relationship with their clients, cultivate the development of their employees, pour profits back into their companies, and manage their electrical business for the long-term, Griffin says.
“Those that thought the economy was coming back were proven wrong,” Griffin says. “If you're waiting for it to come back, you'll be waiting a long time.”
For a forecast of what lies ahead for the remainder of 2003 and into 2004, see the chart above. To learn more about the Top 50 electrical contractors, check out Electrical Wholesaling's Web site at www.ewweb.com for capsule summaries for each firm.
CONTRACTORS BY REGION
|National||2002 Sales||Top 50 Rank|
|Integrated Electrical Services Inc.||$1,475,000,000||1|
|EMCOR Group Inc.||$1,192,171,000||2|
|Quanta Services Inc.||$927,500,000||3|
|Henkels & McCoy Inc.||$604,000,000||4|
|MYR Group Inc.||$503,000,000||5|
|Mass. Electric Construction Co.||$378,675,000||7|
|Sargent Electric Co.||NA||20|
|Constar International Inc.||$116,000,000||27|
|New England||2002 Sales||Top 50 Rank|
|Wayne J. Griffin Electric Inc.||$113,061,000||30|
|E.S. Boulos Co.||$62,000,000||48|
|Other Players: InfraSource Inc. and E-J Electric Installation Co.|
|Middle Atlantic||2002 Sales||Top 50 Rank|
|Petrocelli Electric Co. Inc.||$162,114,000||17|
|E-J Electric Installation Co.||$109,000,000||32|
|Other Players: Hatzel & Buehler Inc. and Wayne J. Griffin Electric Inc.|
|East North Central||2002 Sales||Top 50 Rank|
|Motor City Electric Co.||$187,500,000||16|
|Aldridge Electric Inc.||$118,000,000||25|
|Faith Technologies Inc.||$117,000,000||26|
|GEM Industrial Inc.||NA||34|
|EEI Holding Corp.||$83,000,000||39|
|Other Players: InfraSource Inc., Sachs Electric Co., Guarantee Electrical Co., Hatzel & Buehler Inc. and Cleveland Electric Co., Inglett & Stubbs Inc. and Wayne J. Griffin Electric Inc.|
|West North Central||2002 Sales||Top 50 Rank|
|Sachs Electric Co.||$145,000,000||21|
|Capital Electric Construction Inc.||$114,300,000||29|
|Guarantee Electrical Co.||$112,000,000||31|
|Hunt Electric Corp.||$84,971,000||38|
|Commonwealth Electric Co.||$64,809,000||46|
|Other Players: Faith Technologies Inc., EEI Holding Corp. and Ingett & Stubbs|
|South Atlantic||2002 Sales||Top 50 Rank|
|Tri-City Electrical Contractors Inc.||$139,000,000||22|
|Truland Systems Corp.||$114,954,000||28|
|Inglett & Stubbs LLC||$87,000,000||37|
|Miller Electric Co.||$83,000,000||40|
|Hatzel & Buehler Inc.||$70,668,000||45|
|Patrick Power Corp. (Driscoll Ltd.)||$64,000,000||47|
|Cleveland Electric Co.||$61,000,000||49|
|Other Players: InfraSource Inc., Fisk Corp., Red Simpson Inc., Bergelectric Corp., Wayne J. Griffin Inc., EEI Holding Corp. and MMR Group Inc.|
East South Central
Players: Red Simpson Inc., Sargent Electric Co., Inglett& Stubbs Inc. and Wayne J. Griffin Electric Inc.
|West South Central||2002 Sales||Top 50 Rank|
|Red Simpson Inc.||$213,000,000||13|
|The Newton Group Inc.||$131,000,000||23|
|MMR Group Inc.||$77,000,000||41|
|Industrial Specialty Contractors LLC||$73,200,000||44|
|Other Players: Amelco Corp. and Motor City Electric Co.|
|Mountain||2002 Sales||Top 50 Rank|
|Cache Valley Electric Co. Inc.||$87,667,000||36|
|Ludvik Electric Co.||$54,584,000||50|
|Other Players: Fisk Corp., SASCO Group, Amelco Corp., Bergelectric Corp., Helix Electric Inc., Commonwealth Electric Co., Fisk Electric Corp., Morrow Meadows Corp. and Inglett & Stubbs Inc.|
|Pacific||2002 Sales||Top 50 Rank|
|Rosendin Electric Inc.||$235,000,000||12|
|Helix Electric Inc.||$162,000,000||18|
|Rex Moore Electrical Contractors & Engineers||$100,000,000||33|
|Oregon Electric Group||$89,000,000||35|
|Another Player: Ludvik Electric Co.|