Good morning. My name is Doris, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group third quarter 2017 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Mr. Bradley Vett with FTI Consulting, you may begin.
Thank you, Doris, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2017 third quarter results, which were reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.
Thank you, Brad, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the third quarter of 2017. It's crazy to me how quickly this year has gone by. For those of you who are accessing the call via the internet and our website, welcome, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are currently on slide two. Slide two are the folks that are with me to discuss the quarter and nine months 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 of 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 presentations. You can find us at emcorgroup.com. Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR management's perception as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for our services, adverse business conditions, increased competition, mix of business, and risks associated with foreign operations.
Certain of the risks and factors associated with EMCOR's business are also discussed in this company's 2016 Form 10-K and in other reports filed from time to time with the Securities and Exchange Commission. With that said, please let me turn the call over to Tony. Tony?
Hey, thanks, Kevin. We had a great quarter despite significant Industrial Services segment headwinds, which was primarily caused by Hurricane Harvey. I'm going to be on pages three to four to start the discussion today. We earned record quarterly earnings per share, diluted share from continuing operations of $1.09 on revenues of $1.89 billion and operating margins of 5.6%. We set quarterly records for operating income, net income and diluted EPS from continuing operations. We had great execution in our Mechanical Construction and Electrical Construction segments. We had strong execution in Building Services and the U.K., and we had a real tough quarter in our Industrial segment, where our customers were hit hard by Hurricane Harvey. This quarter, much like our strong performance over the last two years, really highlights the operational strength and end market diversity of EMCOR's businesses.
We focus and we respond to our customers' needs, we bring strong technical expertise and project and program execution to their business needs, and we do that very well. This continued strong performance showcases our ability to move deftly between opportunities and markets. In our Mechanical Construction and Electrical Construction segments, we performed exceptionally. The strong performance was pretty broad-based by end market and trade. We executed well in both of these segments in commercial, transportation, and industrial/manufacturing. We had extraordinary operating income margins in our Electrical Construction segment of 10.2% and in our Mechanical Construction segment of 7.6%. We have achieved substantial cost savings at the completion of several large, complex projects. As important or more importantly, we've had outstanding overhead absorption over the past 12 months as we have grown revenues with very little fixed cost increases.
Our competition is still very aggressive, our customers are as demanding as ever. If you may recall, we believe that anywhere between 5.5%-6.5% operating margins is very good Mechanical Construction performance. We also believe anywhere from 6.5% to 7.5% to 7.75% operating income margins is very good Electrical Construction performance. As we have said many times, a trailing four to eight quarter average of our operating income margins is more indicative of our overall performance. It has the tough jobs, the resolution of the tough jobs, the really good jobs, the overhead absorption, contracts converted, et cetera, et cetera, all in those numbers. We also had strong organic revenue growth in our Mechanical segment. Overall of 9.9%, about three-quarters of that was organic in the third quarter.
Building Services had a very good quarter, led by continued strong execution in our Mechanical Services business and improved performance in our Commercial Site-based Services business. Despite a decline in revenues, we had improved operating income margin improvement as operating income margin improved from 5.0% to 5.9%. Again, these quarterly operating income margins are not likely sustainable over a long period of time, but we are very pleased that our operating income margins are at 4.6% year-to-date. Really, that's an objective we've been shooting for, to be north of 4.5%, and we want to be able to operate this segment above that. Certainly, the improved mix helps drive this improvement as some lower margin commercial accounts move to their new rightful account holders, and they can go ahead and perform that work at very low margins. Hurricane Harvey crushed our U.S. Industrial Services segment this quarter.
As a result, we've had significant work changed and pushed out. We still do not have great clarity over the revised turnaround schedules for a significantly changed fall and likely changes to the spring 2018 schedules. That will likely cause a short-term reduction in previously planned work as our customers bring their plants to full operational status. We did respond very well for our customers through this disruptive event. Some of our customers who were hit especially hard, especially on the petrochemical side, and right now they're taking detailed engineering reviews underway to plan the work ahead and bring their plants fully online. We do expect to earn some significant work from these plants as they recover, but to date, we cannot place a timeline or value on that work. This delay could cause significant work to be delayed anywhere from six to nine months.
In a lot of ways, it reminds us of what happened with the refinery operator strike in the spring of 2015, as that event created some real headwind for two to three quarters during and after the event. The work eventually came back with some increased scope, but the reality is you cannot find the discrete work or events that you were going to execute. Also, the storm led to under-absorption of overhead, and we were prepped to execute the work coupled with the lost work days from the storm, and we still paid our full-time salary and hourly people despite limited opportunity to gain revenue during those time periods. I do expect our U.S. Industrial Services segment to earn positive operating income in the fourth quarter if work flows as currently planned.
Our U.K. Building Services segment is finally seeing the payoff from all of our hard work of restructuring the company and winning new work and moving through the startup phase on that significant new work. The post-Brexit foreign exchange impact is largely behind us, absent another significant dislocation, and we are realizing the benefits of our improved focus and execution in the U.K. We can see in the results the impact of a successful multi-year effort to improve our business. I want to acknowledge that success, and we look forward to the continued success of our U.K. business. Our balance sheet remains liquid and strong and allows us to not only invest for growth, but also to invest in acquisitions and share repurchases. Our backlog has grown from a year-ago period by 1.5% and stands at $3.96 billion. We had excellent cash flow in the quarter of $135.4 million.
We also had an excellent quarter where we overcame significant, and I just want to emphasize that, adversity in our Industrial Services segment. With that, Mark, I'll turn it over to you.
Thank you, Tony, and good morning to everyone participating on the call this morning. For those accessing this presentation via the webcast, we're now on slide six. Over the next several slides, I will augment Tony's opening commentary with a detailed discussion of our third quarter 2017 results, as well as a summary of our year-to-date results through September 30th. All financial information referenced is derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. Let's revisit our third quarter performance. Consolidated revenues of $1.89 billion are down 1.9% over quarter three 2016. Our third quarter results include $34.7 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's third quarter.
Acquisition revenues positively impacted our U.S. Mechanical Construction and U.S. Building Services segments. Excluding the impact of businesses acquired, third quarter revenues declined organically $71.2 million or 3.7%. U.S. Electrical Construction third quarter revenues of $457.9 million were essentially flat with quarter three 2016. Quarter-over-quarter revenue gains within the institutional, commercial, and healthcare market sectors were offset by revenue declines within the industrial and transportation market sectors due to the completion or substantial completion of large projects active in both 2016's third quarter as well as the first two quarters of 2017. U.S. Mechanical Construction third quarter revenues of $760.1 million increased $68.3 million or 9.9% from quarter three 2016. Excluding acquisition revenues of $17.9 million, this segment grew organically 7.3% quarter-over-quarter.
This segment's revenue growth was primarily driven by higher project activity within the healthcare, hospitality, and commercial market sectors, slightly offset by reduced industrial construction project activity. EMCOR's total domestic construction business third quarter revenues of $1.2 billion increased $67.6 million or 5.9%, with 4.3% of that growth being generated from organic activities. U.S. Building Services revenues of $437.1 million decreased $23.6 million or 5.1%. Excluding acquisition revenues of $16.8 million, this segment's quarterly revenues decreased $40.4 million or 8.8% organically. Revenue growth within their Mechanical Services division was offset by revenue declines within their Commercial Site-based and Government Services divisions due to maintenance contract attrition, primarily occurring in 2016, as well as less indefinite duration and definite quantity project volumes from government-related activities.
U.S. Industrial Services revenues of $145.7 million decreased $93.4 million or 39% due to lower field services activities quarter-over-quarter as a result of Hurricane Harvey's impact to our customers' facilities in the Texas, Louisiana Gulf Coast region. Due to the severity of the storm and its prolonged impact, previously scheduled maintenance turnaround work has been delayed or deferred. Additionally, 2016's third quarter revenues were favorably impacted by the execution of a large specialty services capital project that was completed in 2016. United Kingdom Building Services revenues of $85.9 million increased $12.9 million or 17.6% as a result of new service contract awards that commenced after July 1st of this year. These new contract awards were successful in offsetting the continued weakness in United Kingdom small project and capital project activity. Foreign exchange headwinds were minimal on the quarter-over-quarter comparison and did not substantially impact our current quarter results.
Please turn to slide seven. Selling general administrative expenses of $188.6 million represent 10% of third quarter revenues and an increase of $7.1 million from the $181.4 million reported in 2016's third quarter. The current year's quarter includes approximately $3.8 million of incremental SG&A, inclusive of intangible asset amortization from those businesses acquired, resulting in an organic quarter-over-quarter increase of approximately $3.3 million. This increase is due to unfavorable bad debt experience as well as increased medical costs. The increase in SG&A as a percentage of revenues is due to the factors just referenced, as well as unabsorbed overhead costs within our Industrial Services segment due to the unfavorable impact of Hurricane Harvey and the resulting lost workdays within the Texas, Louisiana Gulf Coast region.
Reported operating income for the quarter of $106.5 million represents 5.6% of revenues and compares to $86.1 million and 4.5% of revenues in 2016's third quarter. All operating segments are reporting quarter-over-quarter improvements in operating income other than our Industrial Services operations. Our U.S. Electrical Construction Services operating income of $46.6 million increased $15.7 million from the comparable 2016 period. Reported quarterly operating margin is 10.2%, which represents a substantial improvement from 2016's third quarter. The increase in both operating income and operating margin is due to continued improved contract performance within the transportation and commercial market sectors, as well as quarter-over-quarter improvement in institutional market sector project activities. Additionally, this segment experienced a $6.9 million loss in last year's third quarter on a construction project located in the Northeast region, which was completed in 2016.
2017's third quarter U.S. Mechanical Construction Services segment operating income of $57.5 million represents an $18.6 million increase from last year's quarter. This represents a 47.8% improvement quarter-over-quarter due to improved operating performance across all market sectors served, with projects within the institutional and water sectors contributing the largest quarter-over-quarter increases. Our total U.S. construction business is reporting an 8.5% operating margin for the quarter just ended, as compared to 6.1% in last year's third quarter. Operating income for U.S. Building Services increased $2.9 million to $26 million or 5.9% of revenues. Acquisitions generated $1.2 million of the period-over-period increase. In addition, both their Commercial Site-based Services and Energy Services divisions had improved performance quarter-over-quarter. Our U.S. Industrial Services segment operating loss of $4.8 million compares to operating income of $14.6 million in 2016's third quarter.
The weak performance in the quarter is attributable to lower turnaround activities, as highlighted earlier in both Tony and my commentaries, due to the impact of Hurricane Harvey. Additionally, as disclosed throughout 2016, last year's third quarter reflected the income contribution of a large field services capital project that was completed within that year. U.K. Building Services operating income of $3.9 million represents 4.6% of revenues, which is an increase of approximately $1.3 million and is a 110 basis point improvement over last year's third quarter. With minimal foreign exchange headwinds in the quarter, it's nice to see the success of our U.K. team directly in our quarterly operating results. Lastly on this slide, as Tony mentioned earlier, we had a strong operating cash flow quarter with cash provided by operations of $135.4 million, which compares favorably to the $81.1 million generated in 2016's third quarter.
We are now on slide eight. Additional key financial data for the third quarter not addressed on the previous slides are as follows: Quarter three Gross Profit of $295.1 million or 15.6% of revenues is improved from the comparable 2016 quarter by $27 million and represents a 170 basis point improvement over the 13.9% gross margin in 2016's third quarter. This quarter-over-quarter improvement was accomplished despite a less than favorable mix of revenues due to the reduced contribution from our Industrial Services operations. Diluted earnings per common share from continuing operations is $1.09 and compares to $0.85 for the quarter ended September 30, 2016. This represents a $0.24 or 28.2% improvement quarter-over-quarter.
Lastly, as Tony started today's presentation, our third quarter results represent new records for Gross Profit, Operating Income, Net Income from Continuing Operations, and Diluted Earnings Per Share from Continuing Operations for any quarterly reporting period. In addition, our Gross Profit Margin and our Operating Income Margin set a new company record for a third quarter. We are now on slide nine. With the quarter discussion behind us, I will now speak to our year-to-date results through September 30. Revenues of $5.67 billion represent an increase of $72.8 million or 1.3% as compared to $5.6 billion in the prior year period. Our year-to-date results include $156.5 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in the 2016 year-to-date period. Excluding the impact of businesses acquired, year-to-date revenues decreased organically $83.6 million or 1.5%.
Significant revenue growth within each of our U.S. construction segments was muted by the year-to-date revenue declines within our Industrial Services and U.S. and U.K. Building Services segments. Year-to-date Gross Profit of $835.9 million is greater than the representative 2016 period by $70 million or 9.1%. 2017's gross margin of 14.7% represents a 100-basis point improvement over 2016, primarily due to improved project execution year-over-year within our U.S. Electrical and U.S. Mechanical Construction segments, as well as a more profitable revenue mix within our U.S. Building Services segment. 2017's Gross Profit and gross margin also benefited from the recovery of $18.1 million of previously disputed contract costs within our U.S. Mechanical Construction segment during the second quarter. Selling, General and Administrative expenses of $552.9 million represent 9.7% of revenues as compared to $530.7 million or 9.5% of revenues in 2016.
Year-to-date 2017 includes $20 million of incremental SG&A inclusive and intangible asset amortization pertaining to businesses acquired. The year-over-year increase in SG&A as a percentage of revenues is due to unabsorbed overhead within our U.S. Industrial Services segment due to lost workdays as a result of Hurricane Harvey. Additionally, increases in year-over-year medical costs and bad debt expense also contributed to the higher SG&A as a percentage of revenues. Year-to-date operating income is $282.1 million and represents a $48.1 million increase over 2016's year-to-date performance. Our year-to-date operating margin is 5%, as compared to 4.2% in 2016's nine-month period. 2016's operating margin on an adjusted basis, reflecting those items we believe impact year-over-year comparability, is consistent at 4.2%.
Our year-over-year improvement in operating margin is 80 basis points and is due to the improved project execution within both our U.S. Electrical Construction and U.S. Mechanical Construction segments, as well as the year-over-year increases in our U.S. Building Services segment. Reported diluted earnings per common share from continuing operations is $2.93 for the nine months ended September 30, 2017, compared to $2.33 in the corresponding nine-month 2016 period. On an adjusted basis, reflecting the add back of transaction expenses related to the Ardent Services and Rabalais Constructors acquisition in April 2016, diluted earnings per common share from continuing operations would have been $2.37 for 2016 as compared to 2017's $2.93, which represents an improvement of 23.6% year-over-year. We are now on slide 10 and hopefully in the home stretch. EMCOR's balance sheet continues to maintain its strength. The variations of note from December 31, 2016 are as follows.
Our September 30 cash balance has increased slightly since year-end due to our strong nine-month operating cash flow performance, offset by funds expended for common stock repurchases, acquisitions, capital expenditures, and dividends. Working capital has increased due to the increase in cash just referenced, as well as a moderate increase in accounts receivable, slightly offset by an increase in our net billings and excess of costs on uncompleted contracts. Changes in our goodwill and identifiable intangible asset balances reflect the impact of acquisitions made during the year, as well as the finalization of the purchase price allocation for a prior year acquisition, net of $36.3 million of intangible asset amortization expense in the nine months just ended.
Total debt of $413.9 million is reduced from year-end 2016 due to the mandatory quarterly principal repayment under our term loan of approximately $3.8 million, of which $11.4 million has been paid year-to-date, offset by new capital lease additions during the first nine months of the current year. As a result of our outstanding borrowings, we currently have a debt-to-capitalization ratio of 20.4%, which represents a slight decrease from year-end 2016. We have had excellent cash flow conversion during the first nine months of this year, our balance sheet continues to reflect our strength. We will continue to maintain our strong risk assessment discipline and remain in a great position to capitalize on market opportunities. With my portion of the presentation finally concluded, I will now return the call to Tony. Tony?
Thanks, Mark. Third quarter is always tough, isn't it?
Oh, yes, it is.
You got to go through. Look, I'm on pages 11 and 12, I'm going to talk a little bit about backlog. There's not really a lot of new news in here. Total backlog at the end of the third quarter is $3.96 billion. It's up $60 million or 1.5% from both September 2016 or end of third quarter 2016 and from year-end. Similar to last quarter, our markets continue to give us quality bidding opportunities across most sectors. Look, the numbers show it, our construction segments are executing very well. When we focus on the market sectors, the commercial market continues to be strong for us, as the backlog at the end of the quarter is over $1.5 billion. It's up 22% from September 2016.
Demand is fairly widespread, we are experiencing strength across both of our construction segments, as well as our Mechanical Services business in Building Services. What we're seeing pretty much dovetails with what most industry publications say. We believe commercial construction will remain fairly good for the foreseeable future. Backlog in the institutional healthcare and hospitality sectors is also up year-over-year and year-to-date, while backlog in transportation and the industrial sectors, or industrial/manufacturing, is down as we work down some large projects, mainly in food processing and transportation infrastructure. Now we'll talk a little bit about backlog by segment. Backlog in our domestic construction segment has remained pretty steady at around $3 billion in 2017, that's even with double-digit year-to-date revenue growth generated for the first nine months. Look, 8.4% of that growth is organic.
There continues to be demand for our construction services. We remain selective in our bidding pursuits. The segments are currently executing and converting at a very high level from both a profit and cash generation perspective. Building Services backlog at remain level of $700 million. It's up about 6% from year-end. It's anchored by strength in our Mechanical Services business, and we do have some nice site-based opportunities that I've talked about that are in the pilot stages right now and not fully reflected in backlog. Our Industrial Services backlog stands at $57 million. Not much has really changed. Few more inquiries, but pricing remains soft. The U.K. backlog is up a bit, reflecting some new contract award wins. I'm cautiously optimistic as I can be with regard to the non-res market. I'm not a real forecaster. We'll let Kevin talk to you about that.
With the U.S. economy improving, a low interest rate environment, maybe someday tax reform, some access to capital, private construction activity should remain relatively strong, hopefully into 2018. What that really means, we expect a 3%-5% non-res market to be able to operate in in 2018, 3%-5% growth. Let's get to the exciting part, pages 13 and 14. We are raising our earnings per diluted share from continuing operations from $3.40 to $3.60 to $3.70 to $3.80. We do expect our revenues to still be around $7.6 billion. The reality is we continue to believe we'll have strong margin performance through year-end. What do we need to do to continue this strong trajectory, really through the balance of the year and going into 2018? First, let's be clear.
Fourth quarter may not, from an earnings per diluted share, be stronger than third quarter, but it's still going to be a pretty good quarter. We do expect excellent execution across most of our business. The first thing we have to do is overcome the significant headwind from Hurricane Harvey in our Industrial Services segment. We're going to have to leverage our cost structure and look for every opportunity to help our customers with their short-term maintenance needs to improve their current operations and also help them as they do their detailed engineering reviews so that we're present for the longer-term opportunities. Look, this storm assaulted our customers' infrastructures in a pretty significant way. Our Building Services segment and U.K. segments will continue their strong execution in the fourth quarter, much in the same manner as their year-to-date results.
We really do expect good performance, but in both cases, Q4 should be good, but in a lot of cases, it could be a little weaker than third quarter, as especially in our Building Services segment, third quarter is one of our seasonally strongest quarters. Our Electrical Construction Services and Mechanical Construction Services segments we do expect to continue the same pattern of success and execution in the fourth quarter that we have experienced in our year-to-date performance. We expect a strong finish to our record year and our year-to-date performance in 2017.
We do expect excellent cash flow to continue, we will continue to look to actively support not only the organic growth in our business and the project opportunities and program opportunities we see, and we have successfully exploited, and we will continue to successfully exploit across our business, but we are actively pursuing acquisitions across all of our U.S. segments. We will balance those needs against share repurchases. Confidence in cash performance and in our business outlook is bolstered by yesterday's board action to increase our share purchase repurchase authorization by another $100 million. Thank you. With that, Doris, I'll take questions.
At this time, ladies and gentlemen, if you would like to ask a question, press star then the number one on your telephone keypad. Again, for any questions, that is star then the number one. Our first question is from the line of Noelle Dilts with Stifel.
Morning, Noelle.
Hi. Thanks. Good morning.
Morning.
I know you guys spent a lot of time talking about the industrial segment on the call. It sounds like there's a lot of uncertainty as you look out to 2018. Could you just give us, I guess, a little bit more detail on what you could see on the positive side as we get into the spring turnaround season, how you're kind of thinking about what could come through in terms of upside and downside? You mentioned that there was some potential for cancellations, can you give us some thoughts on when you might have some clarity there, and then how you're thinking about the fall turnaround season at this point? I know we're getting pretty far out there.
Yeah. Noelle, this was a fairly significant dislocation.
We had lined up, we thought, a pretty decent fall 2017 turnaround season. I think what we said is it looked a lot like what was a pretty strong fall 2016 season. What we experienced first, a lot of that work starts in September. Well, clearly, a lot of that work didn't happen as a result in September because most of that region was underwater. Couple that with plants deciding whether they're just going to get him fixed enough to keep operating again, and most plants are up and operating again, especially on the refinery side, not so much on the petrochemical side. Now they're determining how big the scope of work will be, because remember, a lot of these folks lost production.
Crack spreads are pretty good, so they're balancing, do I do increased scope right now, or I just get back online and think about doing this work sometime out into 2018 and even maybe into 2019? It really does remind us, different event, and it does depend on each facility is unique, but it reminds us a lot of the refinery operator strike. If you'll remember, we got hit pretty hard with the refinery operator strike, and some people didn't. We did because it was our customers, in some cases, that were experiencing the strike. What we saw happen there is what happens is you lose the discrete nature of the work you were going to do. It morphs into another event. We're likely to be the contractor that does that event.
That event, in the short term, may have a reduced scope, in the longer term, it tends to have an enhanced scope. We saw that if you look at our performance in the back half of 2015 going into 2016, even absent the large project we did, we were pretty robust through the first and second quarters of 2016. Remember, that's a year later-
Right
in when that manifested itself. Unfortunately, I think that could be a very similar dynamic this time, and I'd ask my colleagues to kick in on that. We think it's a very similar dynamic that the spring looked pretty good as of in August when we sat down, and we do a very detailed review of the fall and the spring. We try to keep six months ahead at least. We had talk of we were going to have difficulty staffing all the projects potentially in the region, not us, but regionally. That's a difficulty for a different reason. I think any upside that comes in early 2018 is going to be the result of what is now an unplanned event, where people say, "Let's get this going now. We see an opening to do this," or the plant had a come down opening.
On the petrochemical side, it's very different. We have people that are undergoing very detailed engineering reviews. We have some plants that are our customers that were hurt very badly, and the plants aren't even running. Mark Pompa, I'll kick it over to you to give your color, and Kevin Matz, if you have any. What we saw there is we expect that work will be much more planned out because they're trying to get it right, because the demand isn't as strong as crack spreads are on the refined product.
This is Mark Pompa. The only thing I would add to Tony Guzzi's commentary, and not to be duplicative, is it is extremely fluid right now, as you would imagine. Clearly, we're available and capable to help our customer base and anybody else who is in need of our services. I don't think our visibility is going to improve all that greatly until we actually kick over until the first of the year. Clearly, at that point, I think we're going to be in a better position to assess what positive impact it's going to have on 2018 above and beyond what was already on the schedule for planned work.
See what else happens. When you're working in a non-union environment versus a union environment, and we do both-
is in a non-union environment in this specific business, especially your supervisory people down through the foreman level, as you get ready for the season, you're guaranteeing them a certain number of hours. They've forgone other opportunities. We honor that. So one of the things you saw in our numbers was really some pretty significant under absorption you see in our SG&A, because if you look at our SG&A year to date really, absent that, it's terrific absorption in our fixed overhead. The only thing we'd be up is a little bit of incentive comp year-over-year, and not even that because of the correction in industrial. You're really just seeing the impact of the acquisitions, which with our growth we've had over the last few years, and it's something we thought would happen, it's actually happened better than we thought it would.
We added more volume without adding a lot of fixed infrastructure. That's something you can't really tease out of the numbers, but the fact is there.
Okay. That's really helpful. Thanks for that color. Just for my second question, I wanted to shift over to non-res. I was encouraged to hear you guys are expecting a 3%-5% type of growth environment. We've obviously seen some mixed signals in terms of some of the leading indicators that we're watching in terms of a little bit of softening on some of the key commercial verticals. As we think out to next year, is there any real shift in terms of where you think that growth is coming from? Are you expecting a little bit of an uptick in some of the institutional building, or is it really just continued strength on the private side?
When we think of non-res, we're thinking about how it impacts us.
Right.
We don't see any big shifts. Look, we're going to book some significant work probably, but we don't know when that's going to be. We've always said backlog could be a sawtooth pattern, especially with the strong revenue growth in our electrical and mechanical segments. We have pretty robust bidding opportunities yet. I think part of it is where we are in the cycle, and part of it is what our capabilities are in some markets that are particularly strong, especially in the private side. We're doing more fast burn work than we've done. Typically, we're burning large projects faster than we typically would do through 2017. We think that will continue to 2018, backlog book-to-bill might not be everything reflective of what's going on in our business on the construction side over a year period.
Over a year period, I think you get it in the growth rates. We see a pretty good market going into 2018, both for larger opportunities and smaller. Again, every decision's binary. We think we're well-positioned for some of this work. We think the competitive dynamics are still there. We've learned recently, if we try to push the margin on the bidding opportunity a little too strong, we may lose that work. Our competition's willing to take advantage of that opportunity. It's more of a science than an art. Then once we get the work, what's really been happening in our story is really good execution. Really, that execution was, and I said this, was underlying the business in 2016. Unfortunately, it got overshadowed by a couple of really tough jobs.
Right. Okay, perfect. That's really helpful. Thanks.
Our next question is from the line of Adam Thalhimer with Thompson Davis & Co.
Morning, Adam.
Hey, good morning, guys. Congrats on a great quarter.
Thank you.
Can you give us an update on, there were some jobs you mentioned last quarter in the Building Services groups and potential awards. Can you give us an update on this?
Sure. We're executing on both of them now. They could be significant opportunities. We think they will be. They could be a multi-year implementation to full implementation. The only part that's in backlog right, Mark, would be the pilot phase.
Adam, not to interrupt Tony, but one of the two is in a pilot phase, and assuming that we are successful, when they go forward with their plans, we're going to be launching across other regions of the country over the next couple of years. The other project is just in the startup phase right now, and it'll be fully ramped up as we move into 2018.
Yeah. The one opportunity is a total shift for that customer and how they approached a large number of facilities across multiple regions. They're thinking 10, 20 years about how this turns out. To them, it doesn't make any difference. We want to implement as fast as we can, and that's the balance. We're now in negotiations to make sure that we get more protection as we invest SG&A on the slower ramp. To them, it doesn't matter whether it's three years or 18 months. For us, it matters a lot whether it's three years or 18 months.
Great, thanks. Then, Tony, what are you seeing in the M&A landscape right now?
We've had two decent deals close already this year. They both augmented nice capabilities that we already have. It helped build out our fire protection business even more. It gave us a really great Mechanical Services business in the Rocky Mountain region. We expect to close a similar size deal by year-end. It'll be in one of the U.S. segments. We think that'll happen. We'll see. It happens when they happen. We have some nice opportunities we're looking at. Again, just like projects, every deal is binary. Sometimes we're successful, sometimes we're not, or sometimes it takes a multi-year effort for us to do that. We're going to remain disciplined, we're going to balance that opportunity versus organic growth, which is always first. Then comes acquisitions, then comes share repurchases.
Share repurchases happen because we feel that sometimes the best company you can buy, well, always the best company you can buy is ours. We can also augment and make our company better through the right acquisitions.
Lastly, the Ardent business, I know they have some exposure to pipeline construction, there's been some nice movement there with the FERC quorum. Can you give us an update on Ardent?
Yes. We expect that to impact us sometime middle of next year. We thought it would be middle of this year. All that's been pushed out about a year. Remember, we're further down the food chain. The engineering has to happen, the general pipeline contractor gets the award, and then eventually we get the award. Yes, we see the same thing.
That's the electrical segment?
That would be in the electrical segment, yes.
Could add a couple points of growth?
No, it wouldn't be that much. Not the size the electrical segment is right now.
Okay, great. Thanks. Congrats again.
Thank you.
Our next question is from the line of Tate Sullivan with Sidoti.
Hi, morning. Thank you. Can we talk about electrical contracting margins a little bit? I mean, 10.2% was amazing when you said earlier in the call that these margin levels aren't sustainable over the long term, but are you implying that you can maintain 10% here in the near term?
No, I don't think I said that. I think that what I've always said-
Well, you said not in the long term. I'm just sort of seeing what you might expect.
I think what I've always said is a quarterly view on margins, good or bad, is not necessarily the best way to look at our business. If you look back over four quarters in our electrical business today, the trailing 12 months, and it has some noise in it, is about 7.7%, and over the trailing 24 months is 6.6%. Clearly, we're trending to the higher end of that here in the near term. Could be a little bit above that. No, 10.2% could be a good quarterly print. Maybe in some extraordinary year we could do that.
It wouldn't be certain anything we would ever plan our business around.
Right. Okay. Then within the Q, you talked about some type telecom projects and large transportation projects. Are the telecom projects what you've referred to before as mostly data centers? Are they.
Data centers are an element of it. We're doing some other work around that, too.
What's an example of another type of telecom project?
Well, we do some remote stations. We do some substation supporting the telecom industry and other things like that.
Was the transportation project something that maybe finished this quarter and contributed to that 10% margin?
A couple transportation projects hit major milestones.
Yeah, they're not complete.
They're not complete, but we've been able to release some contingency at that major milestone. Really, this was clearly a case of a lot of things going right and a lot of small things going right. There's really nothing outsize happening here as part of the normal business.
Okay. Can you remind me what happened? My last one is, last year in the fourth quarter, when you had a project loss. Are these kind of project losses, was that unique to last year when you had a lot of quick orders within the quarters for petrochemical facilities?
That was-
What's different this year compared to last year?
I'm sorry. This is Mark. I'm going to interrupt Tony for a second. Just looking at 2016 from a complete year perspective, we did have several projects that actually had project losses, some of which were transportation-related, which was impacting our electrical segment through the first three quarters of last year. Specifically in the fourth quarter. Those projects were long-term duration projects that had been in progress pre-2016. The event that happened in the fourth quarter was a discrete project that was a quick turnaround project, where all the work was executed within the confines of quarter four, and that was the project we were successful with recovery with regards to the second quarter of the current year. They were-
Oh, you were? Oh, wow.
Yes.
Okay.
Yeah. In my prepared commentary, I did call out in our mechanical construction segment that we benefited from $18 million of cost recovery in quarter two of 2017, which is impacting our year-to-date results-
Yep
through September, obviously. That was specifically related to that project that was written down in quarter four last year. It would be unusual for us on that kind of project to have the kind of situation that developed for us in the fourth quarter of last year. First, the contract structure is a time and materials type contract structure. It was a very unique situation around labor that we talked extensively about in our year-end call last year.
Got it. Okay. Thanks for that clarification. If I may, you said you have site-based projects not in backlog. What are those, or what's an example of those?
No. What I said is we have two that I've talked about in our second quarter call that could be significant opportunities, and right now they're in their pilot stages. The only part that is in backlog is a very small number. Those are the pilot. Just to remind everybody, for backlog on those type of contracts for us at EMCOR, as of today, we only include one year of the fixed contract amount. We make no guesses on the other work, and we don't take the full duration of the contract. Then when we have those contracts, if they haven't been renewed yet, as we get into the final year of the contract, all we leave in those in backlog is what's remaining on the contract.
Okay. Thank you. Have a good rest of the day.
Our next question is from the line of Tahira Afzal with KeyBanc Capital Markets.
Morning, Tahira.
Morning, Tony. Congrats. Fantastic quarter, obviously. Many congrats to your team.
Yeah, great team.
I guess, Tony, first question. If you look at your implied guidance, it really suggests you will end the year at the upper end of your guidance with operating margins of 5% or so. What do you need to do next year, or what do we need to see in the market happen next year to really see those type of operating margins on all of those?
To start out, we need to continue to have a market that we can operate in. Right? If non-res is growing and gives us a market that we can operate in, then we should be okay as far as having an environment that we can operate in. The second thing is, which is actually the good news story this year, that we have these margins despite the fact, which is usually our most profitable segment, industrial-
Right
really got crushed by what's going on here in the third and fourth quarter with Harvey.
The next thing that has to happen is, look, Tahira knows we're in a tough business. Things happen, and we get on projects sometimes through, I usually say, usually not through our own fault. That's proven out as we prosecute things over time. We're not a big claims contractor. It's not something that I wish we have. This year, we're absolutely operating in a stellar manner.
Right.
We're operating on jobs that our customers and the general contractor and our end contractors are more worried about getting the job done, and we're all working together to get those jobs done. It lined up with a lot of our highly skilled operations getting more work than others maybe this year. We really have had a significant absence of madness. Right?
Right.
We always have something going on, but there's really been nothing significant this year. Knock on wood, we hope to keep that up.
All those conditions will allow this to happen. Going into next year, we don't give guidance at this point, obviously, margins are the biggest leverage point, obviously we'd love to keep these margins, we got our work cut out for us doing that.
Got it. Okay, Tony.
I guess I would point out before I finish, I would point out what Mark said in his commentary. Don't lose sight of the $18 million settlement we had in second quarter and the impact that could have on us.
Right. I hear you. Tony, second point is Valero had the call and as you know, they're a big refiner and that is a key factor for you, as you said earlier on. They're pretty positive on how 2018 is shaping up. Also in terms of some of the growth opportunities that have been kind of missing. In fact, it's probably the most confident commentary they've given in a while. Any thoughts around how much as you look at how to allocate all that cash you're building up, how thoughtful you're going to be around some of the commentary coming from customers on the downstream side?
First of all, they're a great operator.
Right.
We're privileged to be able to work for them at times. Sometimes, though.
Yeah
Let's talk about the dynamics of what could happen in 2018 in the industry. Crack spreads are likely to stay up a little bit.
Right.
There are a lot of positives going on for them. Pretty much this fall turnaround season is like a mosh pit right now of people trying to figure out what they're going to do. Everybody lost some operating days, or a lot of people did in those plants that are really the core of their function. I've learned to acclimate myself to sometimes the more bullish our customers are, the more they're saying is, "We're only going to run these plants hard in 2018, and as a result of that, we may do less turnaround activity and less maintenance." I don't know that sitting here today, but I've known that commentary in the past. What it does is it leads to a lag in end of 2018 and 2019 where the maintenance could come back.
I think they're all trying to figure that out right now. If you expand that to the petrochemical side, some of those plants got especially hit hard, and that could turn into the unplanned work and the buffer that we need to take advantage of if the refinery maintenance work comes down in scope or gets pushed out. We're still very bullish downstream. We believe that we still have product lines and consolidation opportunities that we'd like to take advantage of to better serve our customers.
Right.
We certainly don't do a lot of rotating equipment maintenance right now. We'd like to figure out how to do more of that. We don't do a lot of catalyst work right now. We'd like to figure out how to do more of that. Quite frankly, we don't do a lot of work where we leave people in the plants. That tends to be a little bit lower margin, but it gives you a sustained presence. Sometimes it's a little lower skilled, and the opportunity to do some of that might be good to allow us to continue to build our relationship with our customers. There's all kind of niched products we could grow out, like refractory and everything else. We're bullish on it. I would say we're as bullish on the other parts of our business.
Right.
The two acquisitions we've done this year are examples of things we like to do. Whether it be electrical, mechanical, fire protection, industrial maintenance and construction, just in the general market, mechanical service, maybe a new kind of technician-based service that we look at all the time of things to add or of course downstream. Any one of those tier places we would allocate capital.
Thanks a lot, Tony.
Our last question is from the line of Brent Thielman with D.A. Davidson.
Morning, Brent.
Hey, good morning. Good quarter.
Thank you.
Tony, one more on industrial. Thanks for all the commentary on the turnaround aspect. I was curious, I know you have less visibility here, but do you think all this mess could open up more work for your specialty, your field services business?
Yes. I just don't know when.
Okay. It seems like everything outside of industrial was pretty sheltered from some of the hurricane activity this quarter. Are you seeing any lift in construction or building services businesses in those regions?
We think it was pretty much a wash. I'll tell you, if you go to the commercial side of Houston, we have a very successful mechanical contractor there, a market leader. You talk to that CEO, goes, "Yes, we're helping people get their HVAC systems back up and running. We're fixing our control systems. We're fixing some of their piping systems, their underground systems especially." The counter to that is some longer term projects that were getting ready to get underway are going through another look at the design to say, "Okay, how would we fare in a flooding situation like Hurricane Harvey?" A great example is the Texas Medical Center, what they did after Tropical Storm Allison, when they put basically submarine doors to close in their facility, and really, they fared very well in this storm.
We have a lot of customers, not that it'll probably affect most of what we do other than move the mechanical rooms up a floor or two, which has its own set of issues around when we do that. It's going to be a lot of, I would say, hardening looks at new facilities or significant new facilities that were going to probably launch fourth quarter, first quarter, they're probably going to be pushed out further as now they get the engineers back in and say, "Okay, if this happens again, how would we look?
Okay. That's helpful. I know this large project activity can have a nice impact on electrical margins. Appreciate all the color there so far. I guess those areas where you're seeing the pickup in backlog, commercial, healthcare, hospitality, institutional, can those bring the same size and scale of projects to electrical that, I don't know, other areas like telecom, transportation can?
Sure. It's very project specific. Probably one of the most successful pieces of work we've ever done for electrical was in the transportation sector. One of them may be underway right now, and one of them happened about 10 years ago, 12 years ago. Of course, all the hospitality we worked in Las Vegas on the electrical side was very successful.
Okay. Are you seeing that type of work come through the backlog?
On transportation, potentially, yes.
Yeah.
On hospitality, no.
Not of that size.
Not of that size. Decent work.
Sure. Maybe one more on the M&A front. Non-res market has some good tailwinds. Clearly, there's more growth opportunity to come. I'm sure at least some people are still speculating it could be getting a little extended. Do you see a busier pipeline today? Could you attribute any of that to some folks simply saying, "We're going to try and sell while it's hot?
Well, I think it's less the while it's hot, to more that we can actually sell. They now have two, three, four years of successful operations. Most of them didn't experience that again until 2012, 2013, when some of them got back to operating fairly well. A lot of them are four years older or five years older than they were
Yeah
when this expansion really started. The kinds of folks we buy that you're describing is part of long-term estate planning, and most of them still want to work. We're a logical buyer on the way out, and they really care a lot about what happens to their people.
Okay. Thanks, guys. Congrats again.
Thank you.
That's all the questions we have in the queue. I'd like to hand the call back over to management for any closing remarks.
Hey, thanks a lot. It was a great quarter. We look to finish the year strong, and we'll be back. We'll talk to some of you, I guess probably out on the road a little bit. Other than that, thank you all for your interest in EMCOR and great effort by our folks in the field. Bye.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.