Good morning. My name is Derek. I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group third quarter 2016 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 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Matt Dutcher with FTI Consulting, you may begin.
Thank you, Derek. Good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2016 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, Matt. Good morning, everyone. Welcome to EMCOR Group's earnings conference call for the third quarter of 2016. Man, has the year gone by so quickly. For those of you who are accessing the call via the internet on our website, welcome to you as well. We hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. We are on slide two. Slide two depicts the executives who are with me to discuss the quarter and nine-month results. They are Tony Guzzi, our President and CEO, Mark Pompa, Executive Vice President and Chief Financial Officer, Maxine Mauricio, our Senior Vice President and General Counsel, and Maeva Heffler, our Vice President of Marketing and Communications.
For call participants not accessing the conference call via the internet, this presentation, including the slides, will be archived in the investor relations sections 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. 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, I guess in two weeks we'll have a change in the political environment, changes in the specific markets for EMCOR 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 the company's 2015 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?
Yeah. Thanks, Kevin, good morning, and thanks for joining our call. I'm going to be covering pages three through five. We had a terrific quarter, a record third quarter on almost any relevant metric. We earned $0.85 per diluted share from continuing ops, earned revenues of $1.92 billion, an increase of 13.2% from the year ago period, and we generated operating income margins of 4.5% versus 4.1% in 2015's third quarter. Each of our segments performed well in the quarter, led by a 34.2% increase in operating income in our combined construction operations, with mechanical increasing operating income 46.5% and electrical increasing 21.2%. We had strong, broad-based performance across geographies and end markets. Our operating income margins are strong at 5.7% for our mechanical segment and 6.7% in our electrical segment, despite a $6.9 million charge related to a Northeast transportation project in our electrical segment.
We are over 90% complete on this job, we need to complete our work, then we will seek our rightful entitlement due to us as we should be reimbursed, and we will seek reimbursement for the costs incurred to the project being disrupted and accelerated. We expect the majority of this remaining work to be completed between now and early first quarter. Our building services segment earned 5.0% operating income margins and grew operating income by 40.8% versus the year ago period, with strong performance in our mechanical services business and improved performance in our commercial site-based business. We continue to see strong demand for our mechanical retrofit project services in this segment, driven by the implementation of energy efficiency and savings programs. Industrial services performed well with essentially flat performance, it was strong performance in the year ago period.
We have finished a significant unplanned specialty project that drove the exceptional performance in the first half of the year. Our revenues were essentially flat for the quarter in this segment, we believe this is in line with the market. Remember, we are coming off two very strong years of revenue growth in this segment. Our customers have been active, and since the acquisition of Ruff Construction, we have effectively offered and executed work across a broad range of services. We had some business interruption from the floods affecting our Louisiana shops and services and believe those revenues and operating profit are likely lost for the year. We are still estimating that impact but have reopened our facilities and are nearly back to full operation. The U.K. performed in line with our expectations, we continue to see the stability and improvement gained from our restructuring efforts.
Operating cash flow was strong in the quarter at $81.1 million, and our balance sheet is liquid and strong. Our backlog increased 3.7%, which was led by an increase of 6.4% in our construction segments. Our book-to-bill was at 1.05, despite the strong revenue growth. We had good cost efficiency and control of our overhead. As our SG&A rate as a percentage of revenues dropped from 9.7% in the year ago period to 9.4% in this third quarter. It was a very good quarter, and we have great year-to-date performance. With that, I'll turn it 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 six. I will augment Tony's opening commentary with a detailed discussion of our third quarter 2016 results before moving to year-to-date key financial data 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 today. Let's start with our third quarter performance. Consolidated revenues of $1.92 billion are up $224 million, or 13.2% over quarter three 2015. Our third quarter results include $90.8 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. Electrical Construction, U.S. Mechanical Construction, and U.S. Building Services segments.
Excluding the impact of businesses acquired, third quarter revenues grew organically $133.2 million, or 7.8%. U.S. Electrical Construction revenues of $458.6 million increased to $114.2 million, or 33.1% from quarter three 2015. Excluding acquisitions, this segment's revenues grew to $55.5 million or 16.1% organically. Quarterly revenue growth was largely driven by increased project activity within the commercial and transportation market sectors, offset by quarter-over-quarter revenue declines within the healthcare and water market sectors. U.S. Mechanical Construction third quarter revenues of $697.7 million increased to $110.2 million or 18.8%. Excluding acquisition revenues of $14.9 million, this segment grew organically 16.2%. Our Mechanical Construction segment continues to experience revenue growth across all market sectors, with the commercial, water, and industrial market sectors contributing the largest dollar revenue growth quarter-over-quarter.
This is our fourth consecutive quarter of double-digit organic revenue growth within this segment, and they continue to be successful in growing contract backlog, which Tony will cover in his next section. EMCOR's total domestic construction business third quarter revenues of $1.2 billion increased $224.4 million or 24.1%, with 16.2% being generated from organic revenue growth. U.S. Building Services quarterly revenues of $454.8 million increased $26.5 million or 6.2%. Excluding acquisition revenues of $17.3 million, this segment grew organically 2.2%. Revenue gains within their mechanical and energy services businesses were somewhat diminished by reduced revenue levels within their government services group due to maintenance contract attrition as well as lower indefinite duration, indefinite quantity project volumes. Commercial site-based services quarterly revenues within our Building Services segment were essentially flat quarter-over-quarter.
United States industrial services revenues of $239.1 million decreased $2.9 million or just over 1% due to reduced revenue activity within our shop services businesses due to low levels of capital spending by our customers. This reduction in capital spending is a continuation of a trend that began in late 2015 as a result of crude oil price volatility. United Kingdom building services revenues of $73 million decreased $24 million or 24.7% due to the $13.2 million impact of the continued weakening British pound, as well as a reduction in small project activity when compared to 2015's third quarter as our U.K. customers are still assessing the short and long-term implications of the Brexit vote. Lastly, on revenues, we achieved a new third-quarter record for consolidated revenues and were essentially flat on a sequential basis with our second quarter revenue, which had established a new all-time quarterly revenue record for EMCOR.
Please turn to slide seven. Selling general and administrative expenses of $181.4 million represent 9.4% of revenues and an increase of $16.3 million from the $165.1 million reported in 2015's third quarter. As a percentage of revenues, the current year quarter declined 30 basis points from the 9.7% reported last year. The third quarter includes approximately $11 million of incremental SG&A, inclusive of intangible asset amortization from businesses acquired. Therefore, our quarterly organic SG&A increase is approximately $5.3 million and is due to increases in employment costs as a result of higher headcount and increased accruals for certain of our incentive compensation programs due to higher projected annual results than at the same period end in 2015. Despite such SG&A increases, we were able to reduce our SG&A as a percentage of revenues by effectively leveraging our overhead structure in a period of continued strong organic revenue growth.
Reported operating income for the quarter of $86.1 million represents 4.5% of revenues and compares to $70 million at 4.1% in 2015's third quarter. All reportable operating segments are reporting quarter-over-quarter improvements in operating income, other than our U.K. operations. Our U.S. Electrical Construction Services segment operating income of $30.9 million increased $5.4 million from the comparable 2015 period. Reported quarterly operating margin is 6.7%, which is 70 basis points lower than 2015's third quarter. The reduction in quarter-over-quarter operating margin is due to an incremental writedown of $6.9 million on a transportation construction project in the Northeast, which Tony mentioned earlier, and as a result of continued productivity issues attributable to unfavorable job site conditions. This is the same project that negatively impacted the Electrical Construction segment's second quarter operating performance.
Despite this continued project degradation, we have managed to sequentially improve both operating income and operating margin each quarter of the current year within our Electrical Construction segment. The impact of this project write-down on this segment's quarterly operating margin is a 140-basis-point reduction and is muting strong operating performance from the majority of our other Electrical Construction subsidiaries. 2016's third quarter U.S. Mechanical Construction Services segment operating income of $39.4 million represents a $12.5 million increase from last year's quarter. This represents a 46.5% improvement quarter-over-quarter, as well as a 110-basis-point improvement in operating margin. Our total U.S. construction business is reporting a 6.1% operating margin for the quarter just ended, as compared to 5.6% in last year's third quarter. Operating income for U.S. Building Services increased $6.5 million to $22.6 million, or 5% of revenues.
Acquisitions generated $1.7 million of the period-over-period increase, while this segment's Mechanical Services division contributed the majority of the remaining increase due to higher volume as well as improved project execution. Our U.S. Industrial Services segment operating income of $14.6 million increased approximately $200,000, or just under 2%, compared to 2015's third quarter, with a reported operating margin of 6.1%, or 20 basis points higher than last year's 5.9% operating margin. The quarter-over-quarter improvement is attributable to increased profitability within our field services operations due to greater project activity. U.K. Building Services operating income of $2.6 million, or 3.5% of revenues, represents an $800,000 reduction period over period. The headwind of a weakening British pound and lower quarterly revenues were the reason for the 22.8% period-over-period operating income decline. The impact on consolidated operating margin of the previously mentioned project loss incurred during the quarter within our U.S.
Electrical Construction Services segment is a negative 30 basis points. Our third quarter 2016 cash flow provided by operations is $81.1 million. We are at approximately $128.9 million for the nine months ended. This represents a 34.9% year-over-year improvement, which is exceptional performance when you consider the working capital requirements necessitated by our strong organic revenue growth. We are now on slide eight. Additional key financial data on this slide not addressed during my highlight summary are as follows. Quarter three gross profit of $268 million represents 13.9% of revenues, which has improved from the comparable 2015 period by $32.6 million. Gross margin was flat at 13.9% in both periods. Total restructuring costs were $539,000 as compared to $301,000, and relates to continued restructuring activities within our U.S. Mechanical Construction and U.S. Building Services segments.
Diluted earnings per common share from continuing operations is $0.85 and compares to $0.66 for the quarter ended September 30th, 2015, which represents a 28.8% increase. Lastly, as has become a recent trend of achieving milestones, the results for our operations for the third quarter of 2016 set new third quarter records for consolidated revenues, as previously mentioned, as well as operating income and diluted earnings per common share from continuing operations. Please turn to slide nine. With the quarterly discussion out of the way, I will now quickly cover our results for the nine-month period ended September 30th, 2016. Revenues of $5.6 billion represent an increase of $660.7 million, or 13.4%, as compared to $4.94 billion in the prior year period.
All reportable segments are reporting organic revenue growth year-over-year, except our U.K. Building Services segment, which experienced a $24.5 million headwind due to the weakening of the British pound. Our year-to-date results include $179.7 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in the 2015 year-to-date period. Excluding the impact of businesses acquired, year-to-date revenues grew organically $481 million, or 9.7%. Year-to-date gross profit of $765.9 million is greater than the representative 2015 period by $74 million, or 10.7%. Reported gross margins are 13.7% and 14% for the nine-month periods ended September 30th, 2016 and 2015, respectively. The period-over-period 30-basis-point reduction in gross margin is attributable to the impact of the transportation construction project that has been written down in each of the last two quarters.
Additionally, we continue to have margin pressure within our Industrial Services segment as their revenue mix has a much lower percentage of shop services activities, which have historically generated the highest gross profit margins within the company. Selling, general, and administrative expenses of $530.7 million represent 9.5% of revenues, compared to $488.1 million, or 9.9% of revenues, in 2015. Year-to-date 2016 includes $20.9 million of incremental SG&A, inclusive of intangible asset amortization pertaining to businesses acquired. In addition, the results for the nine-month period ending September 30, 2016 include $3.8 million of transaction expenses in connection with our acquisition of Ardent and Rabalais. Excluding such transaction expenses, our SG&A as a percentage of revenues for the year-to-date period would be 50 basis points less than the corresponding nine-month period in 2015. We have continued to maintain cost discipline despite our record revenue growth.
Restructuring activity has increased from 2015 levels as we continue to refine our cost structure to capture process improvements, as well as maximize utilization of our real estate footprint. Year-to-date operating income of $234 million, or 4.2% of revenues, and represent a $31 million or 15.3% increase over 2015's nine-month performance. 2016's operating margin is 10 basis points higher than the corresponding 2015 period. All reportable segments are reporting higher operating income year-over-year, other than U.S. Building Services, which has had essentially flat performance on a comparative basis. Despite the wind-down and difficult completion of certain transportation projects within the U.S. Electrical Construction segment, this segment's operating income increased 4.7% period over period, while both U.S. Mechanical Construction Services and Industrial Services operating income increased double digits. Our U.K. Building Services year-to-date operating income increased 6.9% at 50 basis points despite the continued foreign exchange headwinds.
The impact on consolidated operating margin of the previously referenced transportation construction losses incurred during the year within our U.S. Electrical Construction Services segment is a negative 40 basis points. Reported diluted earnings per common share from continuing operations is $2.33 for the nine months ended September 30, 2016, compared to $1.92 in the corresponding nine-month 2015 period. On an adjusted basis, reflecting the add-back of transaction costs related to the Ardent Rabalais acquisition in April, diluted earnings per common share from continuing operations would've been $2.37 per share for 2016 and represents an improvement of 23.4% year-over-year. We are now on slide 10. EMCOR's balance sheet continues to build upon its strength and liquidity.
Our September 30th cash balance has increased since year-end due to our strong nine-month operating cash flow performance, offset by funds expended for acquisitions, common stock repurchases, and dividends, net of incremental borrowings from our amended credit facilities. Working capital levels have improved due to an increase in accounts receivable due to our organic revenue growth, as well as reduced levels of accounts payable and accrued expenses, partially driven by a decrease in income taxes payable. Changes in our goodwill and identifiable intangible asset balances reflect the impact of acquisitions made during 2016, net of $30.7 million of year-to-date intangible asset amortization expense. Total debt of $523.3 million represents a net increase of approximately $208 million from year-end 2015 due to an increase in our term loan and funds drawn against our revolving credit facility to facilitate our closing of the Ardent Rabalais acquisition previously mentioned.
As a result of our outstanding borrowings, we currently have a debt-to-capitalization ratio of 24.8%. We remain happy with our balance sheet and our exceptional cash flow conversion during the first nine months of 2016. Both our operating and finance personnel continue to work together to maximize EMCOR's liquidity through strong risk assessment and contract performance. As a result, we continue to be in a very good position to capitalize on market opportunities. With my portion of the morning concluded, I would like to return the presentation back to Tony. Tony?
Thanks, Mark. When you have the kind of year we're having, it's always great to talk about it. For those, I'm on page 11, I'm going to talk a little bit about backlog by market sector. As you can see on the chart, total backlog at the end of the third quarter is $3.9 billion, up $138 million, or 3.7% from September of 2015, and up $131 million or 3.5% from December 31. Despite this really strong revenue growth in the quarter, our book-to-bill was 1.05. Project bookings remained strong in quarter three, evidenced by both strong total backlog and revenue growth, an indicator of our strong execution and project demand that we have experienced in the quarter. Again, it's a 1.05 book-to-bill.
When you focus on the market sectors, we continue to see strong demand from the commercial sector as backlog increased over $100 million from September 2015 and is also up from year-end. Our healthcare backlog ticked up for the first time in a while on the back of a couple projects, including a nice bio healthcare facility in Chicago. There are other sectors that are all very close to last year's levels, again, with a strong demand for our services, especially you can see that with the strong revenue we experienced to continue to grow backlog. With regard to the market, we're asked all the time where we think we are in the non-residential cycle, we've talked about that. I think we've been more right than wrong, but you don't know. I am certainly not a forecaster of markets overall. I've never pretended to be.
I do think that EMCOR is a pretty good proxy for the non-res cycle, given both our sector and geographic diversity. I can say that we're busy. We're very busy right now, we continue to be busy quoting work. We tend to be later cycle than other people, we clearly have been growing this year, especially, at a faster rate than the market. My gut, we are still in a slow, steady growth phase of the market. It may be a little choppy, it may go up and down quarter to quarter, but I still believe we are in a slow growth phase of the market as we head into 2017. I don't think it grows high single digits, but I also think it doesn't go backward, at least not for the first half. It should be mid-single digits.
After that, like it always is, it gets a little foggy. I'm going to move to page 12 and talk about it by segment. We've covered all this really through our revenue discussion and everything else. There's really no new news here, other than to say that we continue to have strong backlog growth in our construction segments. They're up 6.3% from September 2015, the year ago period, and we're seeing strong growth in mechanical, and that's up almost 11%. The electrical segment is basically flat with last year. If you take our revenue performance that Mark just went through, and you take our backlog performance, we've had 13% organic growth in revenues in our construction groups and segments, and we've had 19% overall. That's pretty good growth, and that's well in excess of the market.
Building services is down a little, over 3% from September 2015, and that's really not in our mechanical services business. It has growth characteristics that are very similar to our electrical and mechanical segments. It has to do what goes on in our site-based businesses, where revenues can be lumpy, large contracts move out, and it's the least profitable part of what we do. Industrial services, remember, this is just shop backlog. Most of the work we do in industrial services is in backlog because it's time and material or unit price work. This is for new build heat exchangers, and that market continues to struggle, and it serves the refining and petrochemical service. I'm not sure we're at a new normal. I expect the market to come back someday, but it's certainly not doing that right now.
We've offset that drag really with hustling like crazy to get the new repair work. We expect this new build drag to continue into 2017, really, we see no quick turnaround coming there. As I said on the second quarter call, bidding activity in our markets remain active, and we are winning our share of work, and we're being very selective in the work that we take, because it does us no good to build backlog and revenue that doesn't turn into good profits and good cash flow. I'm going to finish it here on the last couple slides. It's pages 13 to 14. We are going to increase our revenue and diluted earnings per share from continuing operations guidance based on our strong year-to-date performance.
We're going to increase our revenue guidance from $7.4 billion-$7.5 billion, we raise our earnings per diluted share from continuing ops from $2.90-$3.10 to $3.10-$3.20. Both of those numbers exclude the Ardent Rabalais transaction costs. You might ask, what drove our increase in guidance through the year? I think there are three primary drivers, and there are sub-drivers underneath this, but three primary drivers. First, we executed very well for the most part in our mechanical and electrical segments. Sure, we've had some headwinds on some Northeast transportation projects for the year, and we will seek our rightful entitlement. I went through that in my opening comments. When the jobs are completed, we will seek that entitlement. We are very well positioned in both good sector and geographic markets that have benefited from the non-residential recovery.
We are now growing faster than the market and have achieved strong leverage from our fixed cost structure. Our Industrial Services segment has performed well year to date. We benefited from not only an impact project that is likely to be a non-recurring event, but we were and are prepared for these events as we have the labor, technical supervision, equipment, and working capital to mobilize on these efforts and have done that over the last five years. But you do not know when they are going to happen, you react, and you serve your customers. However, our base turnaround business was strong for the spring season and has started strong for the fall season. We also partially overcame the headwind of the declining volume and opportunities in our new build heat exchanger business by working very hard to achieve every repair dollar available to us.
If you look at our Building Services and U.K. segments, they are having decent, solid years, and they have not created any headwind for us. All these factors together have led to a terrific nine-month performance, and it gives us confidence to raise our guidance and project a year that will be a record year for EMCOR on nearly every relevant metric. The question that you will have is, "Okay, Tony, how does your team, this great team we have assembled at EMCOR, how do you take it from $310 to $320, and how do you get towards the top end of that range? How do you do that?" Issue number 1, you continue to have outstanding performance in our construction operations here in the fourth quarter.
2, we can see continued improvement in our Building Services segment led by our Mechanical Services business, and quite frankly, a little snow would not hurt in December. Number 3, a continuation of a decent fall turnaround season that we believe we are in the midst of now. Number 4, continued steady performance in our U.K. segment. We have continued a strong liquid balance sheet. We continue to generate good cash. What are we going to do with the capital we have at EMCOR? We will continue to look for opportunities to add to our business, much like we did in the second quarter with the addition of a very good Mechanical Services business and the addition of a very good Industrial Electrical business. Acquisitions like that add to the segments that we have, is what we will look to continue to do.
We will also look to continue to return cash to shareholders through dividends and share repurchases with more of an emphasis on share repurchase. I am going to take questions now, and I would be remiss if I did not thank the employees and management at EMCOR for really a terrific start to the year here through nine months and a terrific quarter. Thank you all very much. With that, I will turn it back over to Derek.
At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Again, that's star then the number one to ask a question. Your first question comes from the line of John Rogers.
Morning, John.
Hi, good morning. Congratulations on the quarter. Couple of things. First of all, Tony, I guess for you on the industrial services side of the business, you mentioned the pickup in the fall turnaround season, but I'm more curious about what you're seeing in terms of capital spending plans out of the customers there. Has that market changed now with oil prices at least rebounded, maybe more stable here?
We haven't seen it yet on the capital side, John. We do have some exposure to upstream now with our acquisition of Ardent Rabalais. We haven't seen that flow through to the upstream side, which is where I think a lot of the capital was cut. Some was cut then downstream, as they just took, especially the integrated guys, took a wholesale scalpel to their capital. The short answer is we haven't seen it yet. We maybe wouldn't be the best position to see the early signs of that, because even in that business, even if you're building and putting in a new well, the electrical will come a little later. We are seeing strong demand from our customer set, both in the spring and the fall. The spring 2017 doesn't look bad sitting here today.
That will firm up, though, now through the fourth quarter.
Okay. Just in terms of your transportation project that you're seeing the recovery on, I assume it's at least as much as the losses that you've reported on that project, but can you give us a sense of what the timeframe is? Is this something that you have a chance of resolving in 2017?
John, we never try to bake those kind of recoveries into our guidance. If it happens.
Right
As the year happens, we would revise our guidance because it would be an event, if we thought that that could improve our outlook. These things either settle fast or they take forever.
Yeah.
I would put this in somewhere in the middle. It's a very difficult job that's been accelerated and has a lot of outside influencers involved in the job that have made it fairly non-productive.
Okay. I guess just last thing, if I could. I appreciate your comments about the non-residential cycle and the sounds like low single-digit growth that you're looking at. Could you give us a sense of what you're seeing in proposal activity? Does that support that look? We've seen a downturn in some of the AIA numbers.
Again, we're later cycle, maybe we're not seeing what AIA would see.
Yeah.
That tends to be a, at best, in my mind, a qualitative view of the world, not a quantitative.
Sure.
We have not seen a significant drop in the activity that our folks are looking at right now. That varies market to market, and it varies month to month. If you take it in overall aggregate, our folks have proposals and enough outlook to believe that the market should grow low to mid single digits next year.
Great. Thanks a lot.
Thank you, John.
Your next question comes from the line of Noelle Dilts.
Morning, Noelle.
Hi, good morning, congratulations on a really good quarter.
Thank you.
My first question, just first expanding around non-resi. Obviously good results in the quarter, continued backlog growth. Do you think just kind of anecdotally, or are you getting a sense that there's any delay in decision making around projects here ahead of the elections? I'm partially asking that just based on some of what we're seeing in the ABI and then some of the starts data out of Dodge.
I think you look at where we are in the food chain. By the time it gets to us, people are fairly well along on the design and development of a project.
The upstream folks like the architects, maybe the engineers, maybe the general contractors, if they're more on the design build side, may see that and have those macro discussions. We at EMCOR tend to have micro discussions.
Right.
It's a project that's already developed and thought about. We're not seeing people delay decisions based on whatever may happen in two weeks.
Yep. Maybe could you touch on your exposure, just how you're thinking about potential federal stimulus in the infrastructure space and where and how you might see a benefit?
Where we would benefit the most is first by increased IDIQ spending in our government's business market, that's been down, right, since when?
Yeah. Well, it's been down since 2015.
Right.
Yeah.
Late 2015, carrying into 2016.
It's down yet from where the sequester started, right?
We haven't gone back to pre-Sequester levels.
Maybe that would be a place we would see in United States building services, some return to more normal levels of spending, pre-Sequester. I think that's going to have to happen anyway.
It's just not working. The second area we would probably see it is if some of the transportation projects on the electrical side got advanced and got bid. That's really where we participate in transportation work. We also will do mechanical work around airports if that would advance. BRAC typically had been a good thing for EMCOR through the years, and we participated in those projects. I think it'll have, other than the IDIQ work, little to no effect on 2017.
Okay. Just shifting over to the United States industrial services business. Looking back now over the past few quarters, you've really seemed to outperform your peers here. I know you go back to the idea that it depends on what you're seeing out of your customers, right? As you just said to John, you're seeing strong demand from your customer set. Is there something about your customer set that you think maybe is driving a little bit more spending? Maybe you could touch on your petrochem customer exposure if you're seeing some share gain there. I'm just trying to understand how you've now consistently outperformed some of your peers in the turnaround space over a multi-period basis.
Noelle, I'm always careful to talk too much about how others are doing versus how we're doing. Here's what I know about us. We have some of the best operators in the business, and they're technically really good. Because we have some of the best operators, we attract the best craft labor and the craft supervision that come with that. When customers have major issues, since the acquisition of RepconStrickland, we can really put together a great team to solve a problem. I think they know that since that acquisition, and really putting the whole thing together, what we had together with Ohmstede and Redmond, I think people also know with the financial strength of EMCOR, they know that we're going to have the resources to get those jobs done.
When you put technical expertise with great leadership together with financial strength, with a very demanding customer base, and thank goodness, underlying all that, a terrific safety record, you tend to get opportunities that others might not see. Our guys are, some of them are the pillars of the industry, and we benefit from that. I can't speak to what the others do. I can only speak to what we do.
Okay. Thank you.
Your next question comes from the line of Tate Sullivan.
Hi. Thank you. In the press releases, you noted the contribution from a recent acquisition or acquisitions, and I assume that most of that was Ardent, even though you said there was some flood impact in Louisiana. Are you getting a benefit from Ardent earlier than you expected in general? Related to that, on slide six, just eyeballing it, looks like your industrial backlog increased. Is some of that Gulf Coast related work?
No, on the Gulf Coast. We did get some backlog in the electrical segment from Ardent. Some of that would be Gulf Coast related. I'm going to flip it to Mark here in a second. We had three acquisitions if you look at the past year. We made a good fire protection acquisition in the Midwest in fourth quarter of last year.
October.
Yeah. Fourth quarter, right? We made a good mechanical service acquisition right before Ardent, then we made the Ardent Rabalais acquisition. These are three really good companies that fit the kind of things we like to do. It's the right point of the cycle for us to have acquisition activity because people put a couple of years behind them. Mark, maybe you can give them a little more detail.
Yeah. Tate, with regards to the impact of acquisitions, we've obviously disclosed in the press release, and in our commentary, when you get the opportunity, if you go to the Form 10-Q, you can actually see the actual contributions by segment. As I mentioned, just to reiterate, electrical building services and mechanical construction all benefited from the acquisitions Tony just touched upon. With regards to Ardent's contribution being quicker or more significant than anticipated, I would say to date, they're in line with expectations. I don't know that they're going to perform in the fourth quarter at the levels that they have through the first months of ownership, just because of the seasonality of their business.
Having said that, everybody's been mostly in line with what we expected and in the Ardent situation, to a lesser extent in the acquisition that was closed in the fourth quarter last year in mechanical construction. Those are backlog driven businesses, so we still need to burn through the amortization associated with those acquired contracts. We should be mostly through that by the early part of 2017.
If you took that group of acquisitions together, you go to my last comment, there we bought in fire protection, sprinkler work. We bought in industrial electric and electric, and we think that Ardent's an option on the future of upstream oil and gas that we were lucky to get at not having to pay for it for the upstream oil and gas. The last one was a mechanical services acquisition. If you took that mix of acquisitions and said, "Is that stuff you would do in 2016 at the end of the year or 2017, if they became available or end of 2017?" These are the kinds of things we like to do. This is the right point of the cycle for that to happen.
One of the sort of questions you get that make no sense, typically, is when business goes bad, people say, "Oh, it's a great acquisition environment." It's a terrible acquisition environment because people don't sell on weak numbers. We don't buy things, we try not to buy things that need major fix-up because we depend on management to grow our businesses, and we like to buy good companies. We're at the right point in the cycle for acquisitions to become available, and we have enough visibility to think they, like Mark said, that they can meet the expectations we have for them.
Okay. Thank you. On separate topic on the transportation project again, it's amazing to consider how much you exceeded expectations, you even take out that per share impact from that one transportation project. Should I be concerned with what I think you're going to do on the Tappan Zee Bridge project, for instance, or road transportation projects, bad projects in general? Can you just talk about the outlook of that business?
Well, some of the best projects that have ever been performed at EMCOR have been in the transportation segment. Once in a while, you get into a confluence of events that are just bad all the way around, from outside pressure to deadlines, to poor designs, to terrible general contractor management. You put all that together sometime on a job, you get to a bad place. I am bullish on transportation at EMCOR for the long term, and it's been a key pillar and foundation in our electrical segment.
Okay. Thank you very much.
Your next question comes from the line of Tahira Afzal.
Hey, folks. Great quarter. Congratulations. Thank you, T. Tony, if I look back historically, there was a year you guys did 5% operating margins. If I mix out these project issues you've had in terms of losses, you're kind of eking up to 4.5% potentially for this year. How do you look at sort of margin expansion drivers as we go into next year? It becomes difficult when you think about the mix for us to see 5% operating margins right now. J
ust because our shop business is down so much, right? On a combined basis. If our shop business was strong, I think collectively as a team, we'd say, "Yeah, there's a shot at that." Because that part of the business has turned from a strong positive to a negative, it becomes hard for us. See, it gets us to mix issues in general, right?
Yeah, I think you could correct for the projects this year, and you could say that's happened. The reality is, with the size we are now, we don't have the kind of losses we have on this particular issue we're dealing with right now. In 3,000 projects, there's always some level of thing going on there. We don't execute 100%, no one does. I think, if you add back that impact that we have, Mark, that's probably a pretty good place, because most of our businesses are firing at a pretty good level right now. Yeah. Other than the pricing environment overall in the Industrial Services segment, in addition to the shop is still has pressure on it. Yeah.
The pricing overall, T, I sat in a meeting, and people say, "Where's pricing?" We were with some people that see broad sections of the market last Friday. I think the general consensus of those folks, and they're looking more up our customer base versus us. Margins clearly haven't recovered to where they were in 2007, and most of us don't believe that will happen because of the slow nature of the recovery in non-res. The positive of that slow recovery is we don't have the kind of labor exposure we would have in a quicker recovery because people have had a chance to build their labor force over time versus just building it quickly. Right. Margins haven't recovered to those levels. When you see us expand margins right now, it has a lot less to do with pricing.
Our customers are buying tough. Execution and efficiency. It has a lot to do with execution and efficiency and things we've brought to jobs like GPS, like through the Trimble systems, through BIM. BIM leads to pre-fabrication. It's led to very close coordination with our supply base, so we can be more efficient. It's led to a lot of and better pre-planning when we can. What I mean by around that is really sitting down and figure out sections of the work that can be done with the least amount of disruption. When you're a trades contractor and you put labor on the job, everything's about making sure you have productive resources with the tools in their hand to work safely and get it done in the most efficient manner possible. Right.
That's different than someone that's a general contractor or a construction manager or even a broader EPC. Got it, okay. Tony, in your prepared comments, you talked a bit about healthcare after a while. Are you seeing some sustainable potential improvements coming in that sector? Or should we regard this more as sort of one-offs right now? I'm still in the one-off camp. Yeah. I think hospitals still are trying to figure out how to make money under the Affordable Care Act, that certainly is not going to sort itself out anytime soon. Got it, okay. Last question I had, Tony. There's a lot of talk about infrastructure obviously into the election, but there seem to be also fairly meaningful implications for the power segment. Do you see that as an opportunity for EMCOR to play on, or is it some source of uncertainty?
No, I think it is an opportunity. I don't think it's a 2017 opportunity. I think it is an opportunity. I think it comes two ways. One, we do participate in solar as a specialty sub, and we've done some work out in California, and we've done it fairly well. We do participate and win with some very specific projects in the Rocky Mountain region, where we will build limited transmission and distribution lines. Right. We participate probably more significantly in two areas that may be not as obvious. One is in cogeneration. Small cogen plants. Gas generation in general, we are well-positioned in a couple markets to take advantage of that. As the electrical or mechanical sub, we will not do this work EPC, have no desire to do this work EPC. The third area that's not as obvious is cleanup.
Because of our industrial footprint, not only in industrial services segment, but also in our mechanical segment specifically and a little bit in our building services segment, we have workers that can help decommission, whether it be a coal plant or the things that go around a coal plant. We haven't seen that yet a lot, but I think that's an opportunity as you go further past 2018 into 2019, into 2020. Perfect.
Thank you very much, and congrats again. Thank you, T.
Your next question comes from the line of John Rogers.
Thanks. Just maybe following up on that a little bit. Tony, it seems like every cycle for EMCOR, non-res cycle, the conventional vertical building becomes less and less portion of your overall business. I guess, where do you see yourself positioning over the next couple of years in non-building work as a portion of EMCOR?
Yeah. Buildings are still an important part of what we do.
Yeah.
It forms the foundation of the company. It did. It's still a big part of our mechanical and electrical segment, still a big part of our building service segment. John, that's right. You look at, we built in a whole industrial segment that really has nothing to do, services segment, that has nothing to do with the building segment.
As well as industrial construction.
As well as industrial construction. Underlying, especially in our mechanical and now in our electrical with the acquisition of Ardent. We have spent a lot of resources both through organic growth and building out capability we already had, but also through acquisition, to build industrial construction and manufacturing capability to support those customers. You can look at companies we have, like Contra Costa, like the University Mechanicals, like Shambaugh. You can look at how we've organically added to the terrific teams in each of those places, especially Shambaugh and Contra Costa. These folks know how to do this stuff, and the UMechs, right? The Wasatches. We added there. That was more organic. We also took that and said, "Okay, what are other things we can add?" PPM, Southern Industrial, Ardent. These are things outside of Bonson.
These are things outside of the industrial services segment, and all of them play in those markets. They play in the maintenance part of those markets. We went from a company that was primarily focused on the building sector in 2001 or 2002, to a broad-based specialty trade contractor that can serve a broad swath of construction and service needs in the U.S. Where do I see it going from there? Well, I think we're now at the point we have really 4 well-defined segments, and that includes the U.K. with its building services segment. We can continue to add responsibly in our electrical and mechanical. We still have geographic opportunities that would allow us to be in the building. We have geographic opportunities industrially. We have geographic opportunities for just specific trades contractors in those segments.
Mechanical services in the building services segment, we have geographic opportunities that we're still lacking, and we look. We look all the time. I said this could be a good time for acquisitions of those kind of companies, like the last three we bought, that become available. We have opportunities to add to our services in the refining and petrochemical. We still could add to our bundle of services, either organically. For example, we don't do much work around catalysts. We do a little bit. We don't do much work around refractory. We do a little bit. We could do more in each of those areas. That's how we think about the business. We'll have the capital to do it. We can grow organically and through acquisition growth.
What would you say, not so much for the last quarter, but is the balance within EMCOR now between that, and I'm saying vertical construction or building construction versus the industrial civil side of the business at this point?
Yeah, I think you could just look at the numbers, and I think you could probably say we're probably still 50%-55% vertical construction, profit-wise, and 40%-45% not. The only reason we get to 50% or 55% vertical construction is we bring other things in there, like data centers, Datacom work and others, and that would get you to the 50%-55%. Otherwise, I'd say it's a 50/50 company now.
Okay, great. Thank you.
Your next question comes from the line of Tate Sullivan.
Hi, thank you for taking the follow-up. More on a specific potential market. You talked about refinery turnaround type work, also on the topic of inter-quarter orders that you received in 2Q, what are you doing currently and what can you do? What's the opportunities set for chemical plants that are being built or expanded or already in operation in the U.S.?
We do more petrochemical. We don't do a ton of work in pure chemical plants. We do petrochemical work. We do the same kind of work in petrochemical plants that we do in the other ones. Typically, usually the work is smaller. It's not as robust. That being said, some of the larger turnarounds we've done have been in petrochemical plants and not refiners. Their cycles tend to be different than the refiners. They tend to be a different cycle. What I mean by that is, when refiners are strong, sometimes the petrochemical historically haven't been as strong. We're not finding that to be necessarily true right now. It's the same services. We're doing mechanical turnaround work. Now we can do electrical turnaround work.
It's more maintenance focused and capital, both with the acquisition of Ardent and Rabalais.
Puts us in more-
We have more capital capability.
Yeah, because of the E&I work and all the things around it. Think about what they're trying to sell into. I got to bring highly skilled people. I got to flex a workforce. They've got to be working under the most demanding timelines, and they've got to do it in an unbelievably safe and conscious manner and have the right equipment. There's a broad swath of those kind of customers that we can serve.
Okay. Thank you very much.
Now we will turn the call back to management for closing remarks.
Look, we're off to a great start, obviously, and it's beyond a start now. We're just finished our third quarter. We're 75% of the way through the year. We are very thankful for the performance and the trust that our customers have given us to execute work for them. We're going to continue to try to do that as best we can in a safe manner and take care of our employees. Obviously, with our guidance, we expect to do okay here in the fourth quarter. We're hoping for a decent non-res market, low single digit growth as we go into the next year. One thing I want you to remember about EMCOR is, we got to go out and hustle every day to keep this $7.5 billion now machine going.
We have a lot of people that do that, and thank you all for listening, and we won't talk to you again together until February.
Yep.
All of you have a great end of the year. Be well.
Thank you for your participation in today's conference call. You may now disconnect.