Earnings Call: Q4 2017

Feb 22, 2018

Good morning. My name is Adam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the EMCOR Group 4 Quarter And Full Year 20 17 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and Mr. Bradley Bittu with FTI Consulting, you may begin. Thank you, Adam, and good morning, everyone. Welcome to the EMCORE Group conference call. We are here today to discuss the company's 2017 fourth quarter and full year results, which were reported this morning. I would like to turn the call over to Kevin Matts, Executive Vice President of Shared who will introduce management. Kevin, please go ahead. Thank you, Brad, and good morning, everyone. Welcome to EMCORE Group earnings conference call for the quarter full year of 2017. For those of you who are accessing the call via the internet and our website, welcome to you as well. And we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. Please advance to Slide 2. This presentation and discussion contains forward looking statements and certain non GAAP financial information. Page 2 describes In detail the 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. Over to Slide 3, it depicts the executives who are with me to discuss the quarter and full year 2017 results. They are Tony Guzzi, our President and Chief Executive Officer Mark Pompa, Executive Vice President and Chief Financial Officer Maxine Mauricio, our Senior Vice President And General Counsel and our Vice President, Marketing And Communications, Mava Heffler. For call participants not accessing the conference call via the internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under presentation. You can find us at emcorgroup.com. And with that said, please let me turn the call over to Tony. Tony? Yes. Thanks, Kevin, and welcome to our Q4 2017 full year 2017 commentary. I want to apologize upfront for my voice. Have a little bit of laryngitis. I guess I've spent a little bit too much time on airplanes over the last 6 weeks. I'm going to speak to pro form a results for 20 17 throughout my introductory comments. Mark is going to cover the financial performance in detail for the fourth quarter of 2017 and full year 2017, and I don't want to be repetitive. I will be covering pages 4 through 7 in my introductory comments. By any measure, we had a fantastic 2017. We set annual performance records for revenues, operating income, operating income margin percentage, net income, and earnings per diluted share from continuing operations. And most importantly, cash flow from operations. We delivered a record $366,000,000 of operating cash flow, in 2017. We were able to overcome the significant negative impact of Hurricane Harvey to our Industrial segment, in the important fall turnaround season and still deliver outstanding performance for our shareholders. Our U. S. Electrical And Mechanical Construction segments carry the with record performance across the board. We had operating income growth of 54% for the year, on a combined basis across our U. S. Electrical And Mechanical Construction segments. We had 2017 operating income margins of 8.2%. In our Electrical Construction segment and 7.2% in our Mechanical Construction segment. We rated in our Mechanical Construction segment by 60 basis points as we settle some large dispute claims during the year. However, even adjusting for these claim and dispute settlements, we performed in an exceptional manner in both construction segments and had outstanding operating income margins and revenue growth. We executed well across all trades and across all market sectors. Discipline matters in our business and in these segments results show exceptional discipline in executing for our customers and shareholders. Our construction results were driven by excellent productivity, planning and job sign execution. We leveraged our skilled workforce to deliver great results for our customers, and finished a large, complex project work with excellent results. Competition for skilled labor is becoming more of an issue. However, our investments in BIM, pre fabrication and peer learning have served us well as we are able to reduce our peak labor on our work through these investments. Although we have strong demand for our construction services, our results are driven more by execution and a strong pricing market. We still have a lot of competition then we have to be driven to deliver the productivity and quality to earn these results. It was an exceptional year in our construction segments, and we look to continue our success. We have to earn that success every day on an hybrid project. Our Building Services segment had a strong year driven by our Mechanical Services business. We delivered 40 basis points of operating income margin expansion on a 6.8% organic decline in revenues. That's tough to do. We moved this segment to a more favorable mix and both our government and commercial site based businesses exercised strong cost discipline as our revenues remain challenged. In mechanical services, we had excellence in project execution and delivery for our customers. We continue to see strong demand for energy savings projects as our customers look to make their facilities more competitive. We also have some nice new contract wins in our commercial site based business They did not drive 2017 results, but should help us regain momentum in our commercial site based business as we move into comparison we had with an excellent 2016, where we executed well on some large nonrecurring capital projects. Hurricane Harvey made an already challenging 2017 a year that produced poor results in the segment. This segment already was pressured by weak capital spending, and Harvey upended the fall of 2017 turnaround season and continues to drive some recalibration by our customers into 2018. Our UK Building Services segment continues to show improvement. The year was strong with 4.4% operating income margins and 4.4% revenue growth. Our UK team continued a steady improvement of our large scale restructuring that we executed over 4 years ago, when we exited the UK construction market. Backlog dropped from $3,900,000,000 at the end of 2016 to $3,790,000,000 at the end of 2017. Our domestic backlog is down $142,500,000 versus the year ago period. I will discuss backlog more following Mark's comments, but we are still in a very strong domestic market for our services. And our drop is really a result of the very strong organic revenue growth in our construction segments, and we are still in the process of negotiating and developing several large food processing and water waste broader projects that we believe will have a good opportunity to close by mid-twenty 18. Our cash flow was terrific at 3.66 and provides us the foundation to continue to grow and build value for you, our shareholders. With that, I will conclude my introductory comments and turn the call over to Mark. Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 8. As Tony indicated in his opening commentary, I will begin with a detailed discussion of our fourth quarter 2017 results before moving to our full year 2017 performance, some of which Tony just outlined during his executive summary. As a reminder, all financial information discussed during today's call is included in our consolidated financial statements, within both our earnings release announcement and Form 10 K filed with the Securities And Exchange Commission earlier this morning. So let's discuss our fourth quarter performance. Consolidated revenues of $2,010,000,000 and quarter 4 are up $62,700,000 or 3.2%. Our 4th quarter results include $35,900,000 of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCORE in last year's quarter. Acquisition revenues positively impacted both our United States Mechanical Construction And United States Building Services segments. Excluding the impact of businesses acquired, 4th quarter revenues grew organically $26,800,000 or 1.4%. United States Electrical Construction revenues of $479,400,000 increased $2,500,000 or 1 half of a percent from quarter 42016. Quarter over quarter revenue gains within the commercial, institutional, and healthcare market sectors were mostly offset by revenue declines within the industrial and transportation market sectors partially due to the completion or substantial completion of large transportation projects, which were active in 2016 as well as the early part of 2017. United States Mechanical Construction 4th quarter revenues of $790,800,000 increased $73,300,000 or 10.2% from Quarter 4 20 16. Excluding acquisition revenues of $20,500,000, this segment's quarterly revenues grew organically 7.4 percent quarter over quarter. This segment's revenue growth was primarily driven by higher project activity within the healthcare, commercial, hospitality and institutional market sectors, somewhat offset by reduced industrial construction project activity due to the completion or substantial completion of certain large projects earlier in the year. Mcore's total domestic construction business 4th quarter revenues of $1,270,000,000 increased $75,800,000 or 6.3 percent, with 4.6% being generated from organic activities. United States Building Services revenues of $438,300,000, decreased to $5,000,000 or 1.1 percent. Excluding acquisition revenues of $15,400,000, this segment's quarterly revenues decreased $20,400,000 or 4.6% organically. As has been the trend throughout calendar 2017, this segment's Mechanical Services division revenue growth was offset by revenue declines within their commercial site based and government services divisions due to maintenance contract attrition, primarily occurring in late 2016, as well as lower indefinite duration and definite quantity project volumes from government related activities. United States Industrial Services revenues of 207,500,000 decreased $29,800,000 or 12.6 percent due to the continued impact of Hurricane Harvey on both our field services and shop services activities as we have seen both the deferral of maintenance work in addition to scope reductions at those locations where we were providing services during the fourth quarter. As a result of the reduction in field services activities, the volume of pull through repair work opportunities for our shop services was also negatively impacted in the quarter. United Kingdom Building Services revenues of 96,600,000 increased 21,700,000 or 28.9 were successful in muting the continued weakness in small project and capital project activity within the United Kingdom. The foreign exchange impact on quarterly revenues for once actually was a positive $6,300,000. My last comment on quarterly revenues is that our 4th quarter revenues of 2,010,000,000 presents a new all time quarterly revenue record for Amcor. Please turn to Slide 9. Selling, general and administrative expenses of 204,200,000 represent 10.1 percent of 4th quarter revenues and an increase of $9,300,000 from the $194,900,000 reported in 2016 fourth quarter. As a percentage of revenues, the current year $4,500,000 of incremental SG and A, inclusive of intangible asset amortization from businesses acquired resulting in an organic quarter over quarter in of approximately $4,800,000. This increase is primarily due to higher employment costs, mainly as a result compensation program awards earned during earned due to the improvement and operating performance year over year. The modest increase in SG And A as a percentage of revenues is due to certain of our operating companies experiencing better than anticipated operating performance resulting in incremental incentive compensation expense within the quarter to true up for actual full year performance. Reported operating income for the quarter of $48,500,000 represents 2.4 percent of revenues and compares to $74,500,000 3.8 percent in 2016 fourth quarter. Our current 4th quarter operating income includes a $57,800,000 non cash impairment loss on goodwill and identifiable intangible assets. Specifically, as a result of our annual impairment testing as of October 1, we concluded that the goodwill of our U. S. Industrial Services segment is impaired. Resulting in a $57,500,000 non cash earnings charge. This is due to prolonged weak demand for our shop services offerings as a result of continued curtailed capital spending from our we have seen reductions in pricing within both our field and shop services offerings due to challenging market conditions. The remaining $300,000 non cash charge is due to the diminution in value of a trade name for a business previously acquired within our U. S. Building Services segment. Current quarter impairment charges as well as the intangible asset impairment charge taken in 2016 fourth quarter are not reported in our discrete reportable segment information reflected on the lower third of Slide 9. The add back of these items results in non GAAP operating income of $106,300,000 or 5.3 percent of revenues for 2017 fourth quarter as compared to $76,900,000 of non GAAP operating income or 3.9 percent of revenues in the comparable 2016 period. Now, I will speak to the operating income results from our reportable segments for the quarter. Our U. S. Electrical Construction Services segment operating income of $40,300,000 increased $9,200,000 or 29.4 percent from the comparable 2016 period. Reported operating margin of 8.4% represents a 190 basis point improvement over last year's fourth quarter. The increase in both operating income and operating margin is due to continued improved contract performance across most market sectors served with transportation, commercial and institutional project activities contributing the most significant period over period improvement. 2017 fourth quarter U. S. Mechanical Construction Services segment operating income of $61,300,000 represents a $29,300,000 increase from last year's quarter. Reported quarterly operating margin of 7.8% is 330 basis points higher than 20sixteen's 4th quarter. Quarter over quarter improvement in project activities within the institutional, water and healthcare market sectors more than offset reduced project profitability within the hospitality market sector and high-tech submarket sector. As a reminder, our U. S. Mechanical Construction segment experienced a substantial project loss 2016 fourth quarter, which negatively impacted this segment's 2016 4th quarter operating margin by 310 basis points. Our total U. S. Construction business is reporting an 8% operating margin for the quarter just ended as compared to 5.3% in last year's fourth quarter. Operating income for U. S. Building Services of $21,100,000 represents 4.8 percent of revenues and is roughly in line with this segment's 20 team fourth quarter performance. Our U. S. Industrial Services segment operating income of $2,500,000 represents 1.2% of revenues, which is a decrease of approximately $8,700,000 from last year's fourth quarter. The reduction in quarter over quarter performance within our Industrial Services segment is due to the continued impact of Hurricane Harvey on our field services operations as well as reduced pull through repair work for our shop services. As our customers continue to evaluate and execute the recovery plans, we are hopeful to see resumed normal activity within this space. UK Building Services operating income of $5,700,000 represents 5.9 percent of revenues, which is an increase of $3,000,000 is a 220 basis point improvement over last year's fourth quarter. This segment is continuing to make good progress in transitioning the new service their new service contract awards despite small project and capital project demand, not yet back to normalized levels. The table on Slide 10 lays out those discrete items that impact quarter over quarter comparability and reconcile the non GAAP operating margin and non operating income that I referenced during my commentary on the previous slide to our as reported amounts. As you can see the goodwill impairment is removed from our quarter 4 2017 results, as well as the identifiable intangible asset impairments taken in both quarterly periods, Our adjusted non GAAP operating income for the current year quarter is $106,300,000 or 5.3 percent of revenues, which favorably compares to $76,900,000 or 3.9 percent of quarter 4 2016 revenues and is a 38.2% improvement. Tony previously referenced our exemplary operating cash flow for full year 2017 of $366,100,000 of which $127,900,000 was generated during the fourth quarter. This represents excellent performance when facing the headwind of our Industrial Services week at 2nd half 2017 operating performance. Please turn to Slide 11. Additional key financial data for the fourth quarter not addressed on the previous slides are as follows: Quarter 4 gross profit of $311,100,000 represents 15.5 percent of revenues, which has improved from the comparable 2016th quarter by $39,100,000 and represents 160 basis point improvement over the 13.9 percent gross margin in 2016 fourth quarter. The quarter over quarter improvement is due to our strong revenue growth within our U. S. Mechanical Construction Services segment as well as improved project and service execution amongst all of our reportable segments other than U. S. Industrial Services. Diluted earnings per common share from continuing operations for the fourth quarter is $0.90 as compared to $0.69 per diluted share a year ago. On an adjusted basis, reflecting the add back of the non cash impairment losses recorded in both periods, as well as the favorable impact of the Tax Cuts and Jobs Act, which I will further discuss in a moment, Our non GAAP diluted earnings per share would have been $1.13, which represents an increase of $0.41 or almost 57% from the comparable non GAAP 2016 amount. Due to its enactment date of December 22, 2017, The Tax Cuts and Jobs Act necessitated the revaluation of our United States net deferred tax liability at the new 21% federal corporate tax rate which resulted in a benefit of $39,300,000 within our 2017 fourth quarter tax provision, which is in fact a quarterly tax benefit. The newly enacted legislation also imposes a one time transition tax to specified foreign earnings, which have not been repatriated to the United States. The impact of such transition tax as well as any future repatriation of cash from our foreign operations is currently estimated to be immaterial. We are now on Slide 12. I will now augment Tony's 2017 annual commentary. CONSOL revenues of $7,690,000,000 or up $135,500,000 or 1.8% as compared to $7,550,000,000 of consolidated revenues in 20 16th annual period. Acquisitions contributed incremental revenues of $192,400,000 pertaining to the period of time that such businesses were not owned by Q4 in the prior year, positively impacted all of our reportable segments other than our U. S. Industrial And UK Building Services segments. Excluding the impact of businesses acquired, year to date revenues decreased organically $56,900,000 or 0.8%. Consistent with my year to date commentary during our 3rd quarter earnings call, significant revenue growth within each of our U. S. Construction segments was somewhat muted by year over year revenue declines within our U. S. Building And U. S. Industrial Services segments. Despite a $15,900,000 headwind, as a result of negative exchange rate movement between 20172016 and pound sterling, Our UK Building Services segment's strong 4th quarter revenue growth more than offset U. S. Dollar revenue declines experienced throughout the first half of the year. U. S. Electrical Construction revenues of $1,830,000,000 increased $125,200,000 or 7.3 percent, Acquisitions contributed $50,400,000, resulting in organic revenue growth for 2017 or 4.4%. Increased project activity within the commercial, institutional and healthcare market sectors, including a significant increase within the telecommunications submarket sector, with the largest contributors to year over year revenue growth. U. S. Mechanical Construction 2017 revenues of $2,960,000,000 increased $320,500,000 or 12.1 percent compared to 2016. Acquisitions contributed $76,200,000 of revenues resulting in year over year organic revenue growth of 9.2 percent. Higher project revenues within the healthcare, commercial and hospitality market sectors are the driver of this segment's strong annual organic revenue growth and this revenue trend has been consistent throughout the last 2 years, our U. S. Mechanical Construction segment. U. S. Building Services revenues of $1,750,000,000 decreased $56,500,000 or 3.1%. Acquisitions contributed $65,800,000 of revenues, resulting in a year over year organic revenue decline of 6.8%. This annual revenue decline is due to maintenance contract attrition within both of their commercial and government site based divisions, as well as activity within the energy sector. U. S. Industrial Services 2017 revenues of $799,200,000 decreased $268,200,000 or 25.1 annual revenue decrease is due to a reduction in large capital project activity within their specialty field services operations prolonged weak demand for new bill heat exchangers, as well as the continued impact of Hurricane Harvey in the Texas, Louisiana Gulf Coast region, which has impacted previously scheduled maintenance turnaround work. Our UK segment 2017 revenues increased $14,500,000 primarily due to new project and capital project activities throughout the year. Please turn to Slide 13. Expenses of $757,100,000 represent an increase of $31,600,000 as compared to $725,500,000 in 20 16. This increase includes $24,400,000 of incremental SG and A related to businesses acquired, inclusive of intangible asset amortization. As a percentage of revenues, SG and A is 9.8% for full year 2017 compared to 9.6% for the 2016 annual period. The year over year increase in SG And A is due to an increase in headcount and related employee costs within our U. S. Mechanical Construction segment, to support their strong growth in revenues as well as higher expense associated with company wide incentive compensation plans due to our overall increased profitability. Additionally, we experienced an increase in employee healthcare costs year over year. Year to date operating income is $330,600,000 or 4.3 percent of revenues, and represents a $22,100,000 increase over 2016's annual performance. Each of 20172016 include discrete items that negatively reported the negatively impacted reported operating income by $57,800,000 in the current year, and $6,300,000 in the prior year, which we've adjusted for purposes of non GAAP presentation. Therefore, on an adjusted non GAAP basis, The year over year change in operating income is an increase of $73,600,000, while operating margin increased to 90 basis points to 5.1%. From an adjusted non segments are reporting higher operating income and higher US Electrical Construction Services segment operating income of $150,000,000 increased $48,200,000 or 47.4 percent over 2016 levels and represents 8.2 percent of revenues as compared to 6% in 2016. This segment generated higher gross profit from commercial transportation and institutional project activities. Additionally, this segment's 2016 operating income was negatively impacted by $19,400,000 of losses incurred on a transportation project, which reduced this segment's prior year annual operating margin by 120 basis points. Domestic Mechanical Construction operating income of 212,300,000 or 7.2 percent of revenues increased $79,700,000 and operating margins increased 220 basis points over 2016 full year performance. The increase in operating income for 2017 was due to an increase in revenues and associated gross profits within the majority of the market sectors in which benefited from the recovery of certain contract which favorably impacted this segment's 2017 annual operating margin by 60 basis points. S. Building Services 2017 operating income of $81,500,000 increased $4,700,000 or 6.1 percent, due to increased profitability within their Mechanical Services division. Additionally, businesses acquired during 2017 favorably impacted operating income by $2,600,000. Operating margin increased 40 basis points due to an overall improvement in revenue mix year over year. U. S. Industrial Services 2017 operating income decreased $58,800,000 to $19,100,000 or 2.4 percent of revenues. The year over year decrease is attributable to lower gross profits from our specialty services offerings within our field services operations due to reduced large project activity as well as lower turnaround activities, primarily attributable to the impact of Hurricane Harvey which resulted in a deferral or cancellation of previously scheduled turnaround projects. In addition, operating income was negatively impacted by the segment's shop services operations due to a reduction of pull through repair activity as a result of the decrease in turnaround projects previously referenced. The substantial decrease in operating margin is due to lower gross margins as a result of an unfavorable revenue mix and higher selling, general and administrative expenses as a percentage of revenues due to unabsorbed overhead costs as a result of Hurricane Harvey. Emcore UK Building Services operating income of $14,800,000 or 4.4 percent of revenues increased $2,900,000 due to an increase in gross profit service activity within the commercial and institutional market sectors as a result of recent contract awards. This segment's operating income increase was partially offset by unfavorable exchange rate movements of $300,000 during 2017. We are now on Slide 14, and thankfully for Tony. I'm almost done. Consistent with the reconciliation discussed previously on Slide 10, this page reflects the operating income reconciliation from GAAP to non GAAP adjusted earnings for those items that we believe are not reflective of our underlying operating performance. Additive to this reconciliation from the quarterly reconciliation previously discussed, for the transaction expenses related to the acquisition of Arden and Roble that occurred in 2016. Adjusted non GAAP operating income for 2017 reflecting the add back of the non cash goodwill and identifiable intangible asset impairments is $388,400,000 or 5.1 percent of revenues. This compares to adjusted non GAAP 2016 operating income of $314,700,000 or 4.2 percent of revenues, reflecting the 2016 add backs for transaction expenses and the identifiable intangible asset impairment. The year over year improvement in 2017 is an increase of $73,600,000 and 90 basis points of operating margin. The full year tax rate for 2017, as indicated on the bottom of the page, was 28.5% as compared 37.5 percent for the 12 months 2016 period. The reduction in our 20 17 rate is due to the favorable impact of the necessary revaluation of our United States net deferred tax liability from 35% to 21% as a result of the Tax Cuts And Jobs Act being signed into law during December, as I previously mentioned. Additionally, 2017 benefited from several other favorable discrete tax items that occurred throughout the year. The benefit of these favorable discrete items on our full year tax rate was somewhat reduced by the non deductible portion of the goodwill impairment previously referenced. With regards to 2018 planning, I anticipate our effective tax rate will compared to our historical normalized rate of approximately 37.5%. This estimated rate incorporates both the reduction to the statutory federal rate as well as the disallowance of previously available tax deductions, including the repeal of the Section 199 deduction that is commonly referred to as the domestic manufacturing deduction. This reduction in tax rate will represent an increase in annual operating cash flow of approximately $40,000,000 to $50,000,000, based on our current 2018 taxable income estimates. For purposes of developing our earnings guidance range for 2018, which Tony will speak to you in a few slides, We have utilized 28 percent as a tax rate, while we continue to refine our understanding of the new legislation and monitor how taxing authorities conform to the enacted federal tax law. However, I want to reiterate that discrete tax items may occur during the year and could impact our current estimated tax rate Our current thought process on our capital allocation strategy has not changed as a result of the Tax Cuts and Jobs Act as EMCOR has maintained sufficient liquidity to execute on all identified areas of capital deployment. Once again, I will let Tony expand on this topic once I have completed the remainder of my materials and I'll return the presentation to him. Please turn to slide 15. Additional key financial data on this slide not addressed by 12 month highlight summary as follows. Year to date gross profit of $1,100,000,000 is higher than 2016 by $109,200,000, while gross margin is 14.9 percent, which represents 120 basis point improvement over last year. Total restructuring costs of approximately 1.6 $1,000,000 or slightly higher, than 2016, due primarily to severance obligations associated with the functional realignment of certain management and support positions within the company. Diluted earnings per common share from continuing operations for 2017 was $3.83 compared to $3.02 per diluted share a year ago. On an adjusted basis, excluding the impact of the non cash impairment, loss on goodwill and identifiable intangible assets, and the net deferred tax liability revaluation, 20 seventeen's year to date non GAAP diluted earnings per share would have been $4.06, as compared to 20 sixteen's $3.09 per diluted share, excluding the impact of acquisition costs and the non cash impairment loss on identifiable eligible assets in 2016. The year over year improvement in adjusted non GAAP diluted earnings per share is 0.97 dollars which represents a 31.4% increase. Please turn to Slide 16. As Tony mentioned, our balance sheet continues to represent EMCOR's strength With good liquidity and modest leverage, our cash balance increased slightly from December 31, 2016, due to our strong 2017 operating cash flow offset by funds expended for acquisitions, debt repayment common stock repurchases, capital expenditures and dividends. Working capital has decreased year over year due to increases in accounts payable, and our net billings in excess of costs on uncompleted contracts. The change in goodwill is due to the impact of the $57,500,000 non cash impairment charge, related to our U. S. Industrial Services segment referenced earlier net of the impact of acquisitions and related purchase price allocation finalization adjustments made throughout 2017. The increase in net identifiable assets is due to businesses acquired during the year net of the small trade name impairment loss previously referenced and $48,600,000 of intangible asset amortization expense, during full year 2017. Total debt of $310,200,000 is reduced from year end 2016 due to $100,000,000 repayment made under a revolving credit line in addition to our mandatory quarterly principal payments under our term loan. As a result of the reduction in our outstanding borrowings, our debt to capitalization ratio has dropped to 15.6% from 21.6% at the end of 2016. We closed 2017 with another quarter of excellent cash flow conversion and go into 2018 in an extremely strong position. We will not waiver from our disciplined risk assessment and look forward to the opportunities in front of us. With my portion of the formal slide presentation concluded, I will actually return this back to Tony. Tony? You deserve a drink of water. I'm going to cover page 17 here. In its backlog by market sector. Total backlog at the end of the year end 2017 was 3,790,000,000 versus $3,900,000,000 at the end of 2016. We have a few moving parts here. We completed or nearly completed some large food processing jobs that actually accelerated at the end of the year. We are very confident that we will replace those, but it tends to be episodic as we do and we're in negotiation on several nice projects right now. The markets continue to be active as positive economic growth supports increased non residential construction activity. If you look at the AIA consensus construction forecast, it says 4 point percent nonresidential growth for the markets we are in in 'eighteen, that tells about right to me. When you focus on the market sectors, commercial project, backlog was up 19 percent or $215,000,000 year over year, which is very good for us, and it's a very it's a nice sweet spot for us. Commercial projects represent just over 40% of our total backlog. And our early read on this for this year is it should continue to be as mid single digit prote trajectories throughout 2018. Continue construction of data centers, high rise and mixed use residential and significant tenant fit out projects remains strong contributors to the commercial sectors projected growth in 2018. We did have 2 large food process projects reach substantial completion, and we delivered for our customers. These large multi year food processing projects account for the majority of the decrease in our industrial backlog, but we also burned some backlog in a number of the northeast transportation infrastructure projects. We continue to see opportunities in both food processing and transportation infrastructure as we move through 2018 and into 2019. Overall, our markets remain active, bidding activity is strong, And we remain and we will remain disciplined with respect to project pursuit, resource planning and allocation, and then ultimately project execution. I'm on page 18 now. This is backlogged by segment. Using a little rough math, total backlog for our Duke domestic construction segment is down about $200,000,000 of backlog for the Building Services Industrial Services and EMCOR UK segment is up about $100,000,000 collectively. Again, this is a story of large projects versus smaller projects. Very large projects are a little more episodic for us, and we have burned some of this work in our construction segments, as I had just mentioned. We do see really good opportunities to complete, replace that work, primarily do they sequence perfectly, a completion to start up of the next opportunity. Conversely, our U. S. Smaller project backlog, ranging between $250,000 to $5,000,000 is very strong We are also seeing strong demand for some, semiconductor work that may or may not move through backlog. As it may be contracted, in a different way that doesn't allow us to put it in backlog as a fixed price job. We closed the year with backlog in our domestic construction segments at $2,800,000,000. In my opinion, Domestic and Segment Segment's revenue was up over 10% year over year. And backlogs are pretty close to where we started. It really equated to strong performance in a pretty good market. These segments are executing and converting an extremely high level right now. And they are doing it throughout the project life cycle and what a terrific year we had, and we will continue to have. Building Services backlog grew during the year, which was nice to see, and it grew in line with the increase in our commercial sector activity, and it's driven by our Mechanical Services business Although we did have some new contract wins in our commercial site based business, and we continue to see small and retrofit projects across our mechanical service companies. We expect to know who takes a lot of help because that coupled with the desire for more energy savings and the efficiency to replace, will drive replacement demand throughout 20182019. Look, the industrial backlog is up $12,000,000, looks like a big number because it was only $50,000,000. I'd remind you that, most of our work in this segment is a time and material base. This is the shop work. Pricing is still not great. And clearly, we wouldn't have taken an impairment charge if we thought there was a big spike in pricing. The other thing that's happening here is we have headwinds is really we're not servicing some of our customers in Latin America market for new heat exchangers. And there's a lot of reasons why, Bailey, because Venezuela is not healthy right We continue to win some good contracts awards in the UK, and backlog has continued to take up. In summary, bidding opportunities are good. We see a lot of good demand and we will continue to perform well. I'm now on page 19 or 20. It's probably the reason most of you called in today. We will guide to $4.10 to $4.70 in earnings per diluted share continue operations for 2018. This earnings per diluted share guidance incorporates an estimated 28 percent post tax reform tax rate. We expect revenues of $7,600,000,000 to $7,700,000,000. We expect continued growth in the non residential construction market, decent demand for our government and commercial site based services, a strong energy retrofit, market and a choppy and less predictable market with respect to our downstream revining and petrochemical markets. We do expect more clarity in the downstream refinery and petrochemical markets as we approach mid-twenty 18 for both the fall turnaround season and into 2019. Harvey brought some unpredictability in this market. It's always had a level of uncertainty as maintenance scopes expand and contract. And of course, capital planning tends to be the swing resource for us as we tend to be the swing resource large capital projects in this segment. As always, we provide a view we will provide a view on what needs to happen for us to move the top end of our guidance range. We need the U. S. Construction business to perform at the high level at a high level in our U. S. Construction segments. We do have some headwind as we benefited from some significant claim and dispute settlements in 2018, as Mark discussed, and it's in our 10 K. However, we are performing well in a strong market and we expect to continue to perform well in 2018 We will have our work off or is performing at the 2017 operating income margins of 2018, but we do expect strong operating income margin performance. Our U S Building Services segment should return to revenue growth in 2018. And we need to implement our site bridge contract wins well, continue to grow our Mechanical Services business and execute well Department of Defense and some other federal agency customers as they repair their facilities through impacted by sequester now that a reprioritization of their budgets has happened with a new 2 year budget. We should continue to see operating income margin expansion in this segment in 2018. Our Industrial business segment will improve from 2017 to 2018. But it will be weighted to quarters 2 through 4. We had a very strong 1st quarter in 2017, with respect to our field turnaround services. It was our strongest on record since the acquisition of Revconstricken. We do see demand strengthening for us as the year progresses. And as Harvey decimated this sector in Q3 and Q4 of 2017, Our comparisons are much easier. For us to move to the top end of our guidance range, we will need some increased coke or some unplanned event that we don't have as of today. And that is certainly possible as these unplanned events have happened more than a few times for us. Over the last 10 years. Our UK business will need to continue the growth and progress that we have earned over the last 4 years. We expect to continue to have decent cash flows at least equal to net income. We will look to use our cash and balance sheet, as Mark said, to grow organically. And through acquisition, and we'll invest in any of our domestic segments through acquisition. We will return cash to shareholders this year through buybacks and dividends. We would prefer buybacks versus dividends for any incremental return of cash to shareholders. We like how our businesses are positioned. We think we performed exceptionally well in 2017, and we expect to continue to deliver for our shareholders in 2018. And with that, put it over to you for questions. And we'll Okay. And your first question comes from the line of Tahira Afzal with KeyBanc Capital Markets. Thanks. And hey Toni, a very strong 4th quarter. Congratulations to you and your team. I hope you feel better. So I just have a little laryngitis. Just some honey and some sort of room temperature water for you. So I guess, I know you guys always start the year of, with the conservative guidance and that's been your tradition and it seems to have served you well. I was a little surprised at the worst of the guidance? And while the top end seems in line with your tradition, I guess the low end surprised me. It seems pretty low. Would love to get an idea of, really how you're picturing what scenario would that happen under? Okay. I think that happens under we don't rebuild backlog through the year. In the, industrial business, has weaker performance, than we would expect rebounding from Harvey in quarters 3 and 4. It's a pretty uncertain market. I think that's the swing factor for the year. And then remember, we've got to recover what about 20 to 30 basis points overall, Mark. That our overall margins benefited from some of the claims settlements in 2017. And then, I guess, if I'm looking at the industrial sector, I mean, the read through from a lot of the industrial sector earnings has been pretty positive. Do you see what you're seeing just sort of a transient headwind just based on your comp are, as you look beyond this year, do you think there are some serious issues as well? Would love to get your sense that actually, on what you think is going to happen. In an industrial segment, you're talking about the business we do in our segment, not the broader industrial economy. That's what I mean. Yes. Look, I think we're well positioned for a long period of time. I think we're in a pause period in here fourth quarter and a little bit in first quarter. I think there has been unpredictability brought in. We have premier assets in that sector. I'm not as bullish on the shop services returning. To where they were. But look, I think as we move into late 2018 into 2019, it'll be fairly positive. I would say that when you look at the retrues on some of the others, collectively, we've been more right and wrong on what we see. Right. And others tend to, a few others in this segment to do business in our segment, in the industrial segment, tend to get a little bullish, a little too early when there's been a change of events. Got it. Okay. Thanks a lot, Tony. And I'll hop back in the and feel better soon. And your next question comes from the line of Noel Dilts with Stifel. First, I wanted to explore this idea of labor constraints a little bit, which you said are getting a little bit more difficult you know, how do we think about the impact there? On one hand, you know, theoretically as suppliers of labor, you should be getting some pricing. On the other hand, you know, obviously, lack of availability of labor can limit growth. So can you just give us some more thoughts on how to think about that? Well, I want to thank, you know, skilled labor, if you look at where the unemployment rate is, skilled labor is going to be a challenge. Now I would say when you take us versus other contractors, we're more prepared to meet that challenge. I say this a lot, but I believe it because I go see the fill a lot and I talk to people and I know the folks that actually do the work care about. We're an employer of choice, because folks know they're going to get paid every week. They know they're going to be kept safe. They know that they're going to be led by people that actually know the work. Finally, they know that if they do well, there's a good chance of follow on work for them, which is what they care about. Now if you take it overall, what are you doing to replenish We've gotten more creative as have other people. We've worked in the nonunion world to expand our training and the resources will bring in at a lower level. In the union world, with some locals, not all locals, but most locals, have a lot of different classifications to bring people in a lower level and move them to journeymen. On the union side on specific trades like sprinklers. We've had pretty good success, transitioning non union sprinkler fitters to union sprinkler letters. And on the nonunion side, I go back to my first point, it's even more important that those four things be met. Than on the union side because union side, a lot of the employers would have that. The other thing is it's not just the, skill trade. It's also your supervision from foreman through superintendent to project manager. One of the benefits we have, versus other people is our project side can flex, because of the variety of trade we have, we can take more scope. And that doesn't necessarily mean at least the top 2 levels, the superintendent and project manager level need to increase. So we can get more leverage there. About pricing, I mean, pricing is moderately better, but I would argue that when you get to the larger projects, especially you're working with your customer to understand the budget that they have and the options they will have within that budget. What you can afford to do the work for. So pricing flexibility actually decreases on the very large projects because you work as more of a team to deliver the value for your customer. Thanks. That's really helpful. Second question, just shifting over to thinking about the impact of tax reform As you look at some of the incremental cash coming through, is there really any shift in how you're thinking about deploying that cash and your priorities? I would say no. We've been pretty good allocators of capital. And Mark, do you want to expand on that? Yes. And in a while, as I mentioned, in my commentary, the incremental cash, albeit I'd like to have an incremental $40,000,000 or $50,000,000. Once again, doesn't really change how we think about it. And we're going to continue to execute in the manner that we have been for the last several years. Okay. And then last question, when you think about just generally the non residential construction market, I think we've talked before about a little bit of softening in some of the very early cycle verticals like office and, hotel. Is that something you guys are seeing? And then second, how are you guys thinking about at this point the potential for an infrastructure stimulus, bill and and how EMCORE might benefit? The forecast, excuse me, the forecast is still there for pretty good growth, in 2018. We believe that As far as the office market, there's still a lot of retrofit going on, and tenant fit out. There's some spec office building construction. I mean, you saw today that JP Morgan Chase has announced a new seventy story tower in Midtown Manhattan. So I think there's a lot of repurposing, a lot of rethought to some of these old buildings. I just don't fit the needs for people to have today. And you got to think about there were some distortions that happened with some of these large campus projects over the last couple of years. That on their own can bring down demand for office construction like the Apple campus. When that's not being built anymore, That can have a sizable impact on what you view as the overall office construction market. And some of the other work in Silicon Valley, where the new campus like. But on the other side, we're repurposing all the buildings that they were in because of the capability of the company like us have. Hotel, I mean, we don't play in the lower end of the hotel market. As far as the higher end of the hotel market, there may be life coming back to Las Vegas, which would be a good thing for us. There's some nice projects on board that look like they're going to come out of the ground in San Diego. So I think you've got to be much more specific, when we think about the market and then just overall categories because some of those categories wouldn't be work that we would do anyway. So I'm fairly optimistic and in the other market that we play in, that we see strong demand, hopefully, in 2018 and going into 2019 is, high-tech semiconductor. We see that in a couple of places in our footprint in the U. S. Right now. And your next question comes from of Adam Dahlimer with Thompson Davis. Okay. Hey, good morning guys. Great quarter. Good Adam. Introduces Adam. How are you, Adam? I'm great. I wanted to ask first. And maybe I shouldn't overthink this because I know you guys like to start the year with a conservative guide, but just trying to parse through the revenue guidance of basically flat to down for this year. If U. S. Constructions up mid single digits, building services is up, industrial starts to grow in Q2. I just don't know how you get to down revenue this year. Yes, I wouldn't overthink it too much, but the way I think about it is we have to think about revenue that way because we know we start the year, down if you just take everything being equal, $65,000,000 to $100,000,000 based on our backlog being down in construction $200,000,000. So we've got to replace that revenue through book and ship business in 2018, which obviously we think we can do because our guidance is 76 to 77. The other thing is we are expecting to book some large project work. Through the middle of the year. If we do that, you'll see backlog maybe go up. You might not revenue, but you won't see much revenue probably this year. That'll be more of a 2019 2020 phenomenon. Got it. Okay. That was my next question of the timing of backlog growth. Do you think it's more mid year? This could be a year like 2012, too, where we're starting to see revenue go okay at decent velocity because there's more small project work. 2012, we had a large project, a large food process project that never made its way into backlog. And what it finally did, there was a much left. And we have a couple of projects that we could be working on here starting, late April, early May who could have the same characteristics as the customers decide and they want to get moving and want to do it more on a fixed fee or time and material basis, which will lead to revenue burn, but maybe no work will go into backlog. Which you should take very comfortably in some ways because that means we were being very careful on what contracting terms we would take and the market is allowing us to do that right now. And Tony, that was the semiconductor job you mentioned? It could be that in other high-tech work. There's a it's just semiconductor, but other high-tech work that there's a window right now. Where they want to lock in the resources and they may not want to spend months trying to get scope so fixed that we can give them a fixed price. Okay. And then, yes, lastly, and I'm sorry to hammer this. I mean, you're just generating so much cash. And, I would assume M and A multiples are still high. I mean, should we just I guess you can end 2018 probably go into 'nineteen with no debt if you wanted to? We could pretty much do that close to now. We do see opportunities. I'm not that negative on the M and A market now. We did 3 nice deals. Last year, Mark, what was the total purchase price? 170. Yeah, it was, 1. It wasn't insignificant what we did, you know, Mark will give you that number. It wasn't insignificant what we did. We see deals like that again this year. I'll tell you what we're not going to do. We're not going to do something that we know we can't create value for our shareholders over a 3 to 5 year period of $107,000,000. $107,000,000. $107,000,000. So we did that I would expect we'll do that a little more this year, just with what we're looking at today, hopefully a little more. I think owners that we talked to are still sorting out tax reform. Some of the subchapter us provisions are pretty favorable. They may decide not to sell our businesses. That doesn't change some of the issues they have with the state planning and everything else. The other thing is private equity is still very active and still I mean, they must know something we don't know, other than that, but some of the things they bid on at the price, they bid on that make a lot of sense to us. But when they sell it to each other, I guess it does make sense. And so we're just going to keep doing what we do. We have a list of things that we've been working on. And that placeholder could be just in a normal year between $100,000,000 $200,000,000. And in a bigger year, we've done deals up to $450,000,000. I'm not don't think this management team is sort of the, the giant transformational M and A guys because we haven't seen that work in our space. In any significant way. It has to, things we look for, strengthen the trade that we're in, strengthen the geography we're in, strength in a line of service wherein transform 1 of our segments lines of business. But the idea that we would go out and say, you know, let's take 2 like companies and put them together. And quite frankly, there's a lot of SG and A savings and 1+1 really equals 2. Okay. I'll turn it over. Is that it? Adam, is there anybody else on the line for a question? Yes, sir. Your next question comes from the line of Brent Thielman with D. A. Davidson. Tony, a lot of things that's kind of developed here since the last earnings call between kind of tax code changes, inflation coming to bigger topic. I'm just curious if if you've seen that lead to any sort of hesitation to move projects forward in the market at all? No. Not quite the opposite. Got it. And then on the public sector backlog, kind of setting aside those select larger projects obviously caused some lumpiness there. Has the general level of bid activity and kind of momentum in that market or sector continued to expand? Yes. Okay. And there are no further questions at this time. I'll now turn it back to management. Look, we had a fantastic 2017. And that's really a tribute to the 34,000 people that are out there working for EMCOR every day. We have the best skilled trades people. We have terrific supervision. We have local leaders CEOs who run these companies exceptionally well and a great segment and corporate leadership team. We're going to deliver again in 2018. But we're going to be measured and thoughtful in how we do it. Look forward to seeing you all out there. And thank you for your interest in MR. And everybody have a great day. And this concludes today's conference call. Thank you for your participation. 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