The Houston-based consolidator was part of a consolidation boom, where companies such as Comfort Systems and Lennox Retail saw tremendous revenues. It posted $966.5 million in revenues for its first quarter, and a net income of $14 million. Its then-President and CEO Joseph Ivey predicted 2000 revenues to top the $4 billion mark. It almost made it in 2001 with about $3.9 billion in revenue and was No. 4 on Plumbing & Mechanical’s Pipe Trades Giants list.

But just three years later, on Nov. 19, 2002, Encompass filed for bankruptcy protection. Its 2002 revenues are estimated at $2.6 billion, and its pipe trades volume is estimated at $522.30 million, putting it at No. 3 in this year’s ranking.

But that ranking will certainly go down as Encompass has now restructured itself into a new entity, Residential Services Group Inc., which had 2002 revenues of $300 million. While selling off its commercial mechanical contractors piece by piece, Encompass sold its entire residential operation to Wellspring Capital Management LLC, a New York-based private equity investment firm, for $40 million.

Exit, Stage Left

New Jersey-based PSEG decided to exit the mechanical contracting business altogether. The utility discontinued operations of PSEG Energy Technologies, its mechanical contracting arm, based on a review of its “strategic fit” with the parent company. Those discontinued operations put PSEG at No. 9 in this year’s ranking.

So what went wrong with Encompass?

“Encompass was over-leveraged,” says Eric Salzer, president and CEO of Residential Services Group. “It lacked the proper systems to control labor and material, and was involved in many ‘new economy’ projects when the bubble burst. The company also suffered from a loss of bonding capacity and the effects of the slowing economy on the commercial market.”

The Engineering News-Record reported in its Nov. 4, 2002, issue that one of Encompass’ problems was the huge amount of debt the company and its predecessors took on before and after the merger. Encompass (known at the time as Building One), gave cash payments to speculators and stockholders, including those who sold their companies to Encompass, which saddled the company with $700 million in additional debt in 1999 and 2000. Another $200 million in debt came with the merger in February 2000.

But another, less-discussed issue was the decision to integrate units and brand them all with the Encompass logo. This caused much dissent at operating units, ENR notes. “They saw the changes as meddling by the corporate parent into the business of long-successful, privately run contractors that had been promised autonomy in running their businesses.”

Many of the original selling owners left their operations, and several began trying to buy back their businesses. In the months after the bankruptcy filing, many were successful as Encompass sold 37 of its Commercial/Industrial Group subsidiaries for about $163 million. In addition, 10 commercial companies were shut down.

A Company Reborn

An 11-year veteran, Salzer started in the industry as an installer with Reupert Heating & Cooling in 1986 while working through college. He also worked on the research and development team at C. Schmidt Co., a manufacturer of refrigerated display cases and walk-in coolers.

At Airtron, the founding company of GroupMAC, Salzer held a number of positions, including divisional vice president and company president. After the merger with Building One, he was named regional president of Encompass Residential Services and, finally, president of Encompass Residential Services.

Filling out the rest of RSG’s management team are:

• Tim Johnston, CFO — Johnston was at accounting firm Deloitte and Touche before joining Airtron as its CFO. He has been in the industry 15 years.

• Rich Siefring, senior vice president of operations/HVAC — Siefring was Airtron’s senior vice president for 28 years; he has a total of 30 years in the industry.

• Ron Bryant, senior vice president of operations/plumbing — Bryant was the former owner of Masters, an RSG company, and has spent 35 years in the industry.

• Dan Kipp, senior vice president of consumer and service — Kipp was one of the original senior managers of GroupMAC, with seven years in the industry.

“Residential Services Group has a strong financial track record,” he explains. “It consists of 12 premier companies that comprised the residential group within Encompass. The majority of these companies I have been directly responsible for the last four years. All operate within their core competencies, and have solid managers, well-trained personnel and industry leading names, which garner outstanding customer recognition. Many of our units have the first- or second-largest share of their respective markets.”

While some of the former owners left shortly after the sale of their companies, several have returned to head their companies once again. RSG’s current division managers average 16 years of service with their respective companies, Salzer notes. “We continue to value the managers and former owners with successful track records. Those who have returned are part of our team and are aligned with the company’s philosophies and direction going forward.”

RSG companies install plumbing and heating systems in about 46,000 new homes every year. Although the majority of the work is residential, there are some firms in the group that do light commercial and multifamily jobs on a regular basis.

Staying In The Game

The management team at RSG averages 25 years of PHC industry experience. The combined experience and knowledge within its business is “tremendous,” he believes. “This is strengthened by our professionalized estimating and job-costing procedures, as well as a common IT system that allows for timely sharing of information to include market trends at the regional and national level.”

Successful businesses understand the advantages of training personnel, and RSG is no exception. The company conducts quarterly sales and design training at the corporate office to ensure that employees are kept up-to-date with the latest and greatest design practices, which impact the way they design and install plumbing and heating systems.

A plus for RSG is that its financial partners at Wellspring Capital also own Vatterott College (www.vatterott-college.com), one of the premier training facilities in the heating industry. While using this sister company for its educational opportunities, RSG can also look to Vatterott for recruiting new employees.

Another characteristic of successful companies is customer service. Salzer says RSG’s corporate office staff consists of “operationally focused” professionals (rather than accounting-focused) that have successfully managed multiple plumbing and heating locations for most of their careers.

“Our view of the function of our corporate office also differs from that of many of our competitors,” he adds. “We maintain a very lean corporate staff that aims to support our companies with information and guidance and avoid bogging down operations with information requests that detract from field activity.”

With 27 operations in nine states and 2002 revenues of $300 million, RSG is a pretty substantial company. And being a large regional firm, it has some purchasing advantages.

“Obviously, economies of scale will play a role in our purchasing costs,” Salzer says. “Most major equipment and metal products are negotiated on a national level through the corporate office. However, parts and prices are negotiated and purchased locally at this time. We will move towards more national and regional vendor deals where they make sense.”

Another advantage for RSG is that it has the geographic diversity to service large national and/or regional customers. “Our standardized policies and procedures create a consistent quality product for our customers across all of our locations,” Salzer explains. “We find our customers appreciate the ability to use one contractor to provide services in multiple locations. This ability reduces the number of touch points that must be made by large customers when a plan change occurs, a policy changes or a new bid is required.”

While Salzer sees future growth for RSG, it will not be growth by acquisition. RSG has learned from its predecessor’s mistakes and is not looking to buy any firms in the near future.

“We intend to strengthen our service and consumer business by converting our installed-systems customer base to retail service clients,” he explains. “We also expect organic growth in our residential new construction business.”

But Salzer says he would consider small acquisitions if they were “strategically well placed and competitively valued.”

RSG Companies

RSG Business Segments

How The Pipe Trades Giants Happens

This year for the first time, the questionnaire was sent by fax. We received many forms from companies that had never responded before, and 17 of those made their debut on this year’s list. These companies bumped others off the list that had smaller revenue volumes, but three companies either went out of business or were bought out.

Atlantic Coast Fire Protection, No. 46 on last year’s list, seems to have gone out of business as attempts to find the company failed. Natkin Contracting, No. 92 in 2002, was purchased by Scott Co. (No. 15 in 2003) late last year. And No. 49 Fire Suppression Systems seems to also have been bought out.

There were some companies who opted not to supply some or all of the information we requested. So we have estimated sales volume and percentage breakdowns for those companies, indicated with an asterisk. For some public companies, we used information from annual reports or SEC filings. The only way to present a meaningful report on the state of the industry is to include every company that is a significant player, even if it has had a bad year or is in turmoil for some other reason.

Next year’s list will undoubtedly see more changes, but we can predict two companies that will not appear in 2004: Encompass Services and PSEG Energy Technologies. As mentioned in this issue’s cover story, No. 3 Encompass has reorganized into a more residential-focused firm named Residential Services Group. While RSG most certainly will appear in next year’s ranking, it will be at a much lower level. And No. 9 PSEG Energy Technologies, a subsidiary of the PSEG utility, was dissolved as all of its mechanical contracting firms were sold. PSEG and other utilities are selling off part or all of their mechanical contractors to focus on “core competencies.”

Download the complete 2003 Pipe Trades Giant List here