Good morning. My name is Teresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group first 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 the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Mr. Max Dutcher with FTI Consulting, you may begin.
Thank you, Teresa. Good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2016 first 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, Max. Good morning, everyone. Welcome to EMCOR Group's earnings conference call for the first quarter of 2016. For those of you who are accessing the call via the internet and our website, welcome to you as well, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. You should be on slide two. Slide two has the executives that are with me to discuss the quarter's results. They are Tony Guzzi, our President and Chief Executive Officer, Mark Pompa, Executive Vice President and CFO, Maxine Mauricio, our Senior Vice President and General Counsel, and our Vice President of Marketing and Communications, Maja Handler. 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, 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 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?
Hey, thanks, Kevin. I'm going to be on pages three to five now. Look, I'm going to keep my upfront comments relatively brief, as it is only a first quarter discussion, and really not that much has changed in our outlook since we provided our 2016 outlook on February 25th. I am going to speak to pro forma numbers, which adjust for some of the costs of our recent acquisition of Ardent Services. Mark's going to cover those adjustments in detail. On a pro forma basis, we earned $0.57 per diluted share from continuing operations. We had excellent revenue growth of 9.9% with 90% of that being organic growth, and it was really led by our mechanical segment, which had 19% plus overall growth. Our revenues were $1.744 billion for the quarter.
However, part of this organic growth versus the year ago period results from the impact, if you remember, the poor weather impact in the first quarter of last year in our construction operations and the impact of last year's refinery operator strike. However, at least half of this growth, organic growth, is just solid underlying growth in the business. It's really what you see is when we convert our prior backlog growth in our construction operations into revenues. If you look at the segments, we had a drop in operating income margin from 3.5% to 3.2% on an overall basis when compared to the year ago period. We expect our operating margin, income margins to expand through the year and do not view this as a full-year headwind.
The reasons behind this drop is, one, the lack of a one-time settlement in Q1 of 2015 in building services, the lower snow removal revenues in building and the subsequent profit in building services, and the impact of the previously written transportation jobs from last year that are now flowing through at no margin this year versus the year ago period. That really accounts for most of the operating drop for the company and most of all of the operating profit drop in building services from the year ago period. Further, we had some headwinds and write-downs on a few transportation infrastructure jobs in our electrical segment, we have started a few large jobs in both our mechanical and electrical segments that are just underway. We are appropriately conservative on the front end of these large jobs in our margin recognition.
The industrial segment had very good year-over-year operating profit improvement, and one, it was driven by the lack of the strike this year, and it was really driven by an increase in demand for our specialty services like our specialty welding services, which had very strong demand in the quarter. We expected a decent spring turnaround season, and we had and are having one. The U.K. had nice operating profit growth driven by the two large contracts we started up in early 2015, and we're starting to realize the positive impact of those contracts now. Despite our strong revenue growth, we had backlog growth of 2% sequentially and 3% on a year-over-year basis. We had an improved SG&A ratio at 9.6% versus the 10.2% in the year ago period, and we really don't expect that to worsen.
We leave the quarter with a strong and liquid balance sheet with plenty of strength to support both organic and acquisition growth. Overall, a decent start of the year. We do expect our operating margins to improve and catch up with our revenue growth as the year progresses. 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. As Tony just indicated, I will begin with a detailed discussion of our First quarter 2016 results, focusing on our performance by reportable segment before covering 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 this morning. Let's get started. Consolidated revenues of $1.74 billion are up $155.8 million or 9.8% over quarter one 2015. All reportable segments are reporting increased revenues quarter-over-quarter. First quarter 2016 revenues attributable to businesses acquired in 2015 within our U.S. Mechanical Services segment were $14.4 million. Excluding such acquisition revenues, our organic revenue growth in the quarter is 8.9%.
U.S. Electrical Construction revenues of $348.3 million increased $29.3 million or 9.2% from quarter one 2015. This increased revenue was due to greater project activity within the commercial, hospitality, and transportation market sectors as compared to last year's first quarter. U.S. Mechanical Construction first-quarter revenues increased to $100.9 million or 19.7%. As referenced earlier, this segment was positively impacted by incremental revenues from businesses acquired in 2015 of $14.4 million, therefore, this reportable segment's organic revenue growth in the quarter is 16.9%. Our mechanical construction revenue growth continues to be broad-based from a market sector perspective, with the industrial, institutional, and hospitality market sectors contributing the largest dollar revenue growth quarter-over-quarter.
Five of the seven market sectors that we track and report are generating revenue growth within this reporting segment in excess of 40%. Tony will cover the continued backlog growth in Mechanical Construction, as well as our consolidated backlog by market sector later on this call. EMCOR's total domestic construction business first-quarter revenues of $960.2 million increased to $130.2 million or 15.7% quarter-over-quarter. U.S. Building Services quarterly revenues of $439.7 million were essentially flat with the first quarter of last year and were negatively impacted by the lack of snow in markets where we are contracted for removal on an event basis. This unfortunately masks strong revenue growth within their Mechanical Services division, which is currently executing against a substantial project backlog. U.S. Industrial Services revenues of $257.5 million increased $24.8 million or 10.6% due to increased field service activities period-over-period.
As a reminder, this segment experienced significant headwinds in 2015's first quarter due to the impact of the nationwide refinery operator strike. As we commented through much of 2015 and extensively during our initial 2016's earnings guidance, this segment's shop services operations has experienced contraction and demand due to the curtailment of capital spending by most of the integrated oil companies. Despite this current headwind, our Industrial Services segment got off to a very good start in quarter one of this year. United Kingdom Building Services revenues of $87.6 million increased modestly during the first quarter, despite the headwind of a weakening British pound, resulting in a quarter-over-quarter unfavorable exchange rate impact of $5.1 million. This segment continues to see revenue gains as it expands its customer portfolio.
My last comment on quarterly revenues is that our first quarter 2016 consolidated revenues of $1.74 billion eclipsed our previously established first quarter revenue record, which we achieved in 2014's first quarter. Please turn to slide seven. Selling, general, and administrative expenses of $167.4 million represent 9.6% of revenues and reflect an increase of $5.8 million from quarter one 2015. As a percentage of revenues, the current quarter declined 60 basis points from the 10.2% reported last year. The first quarter includes $1.1 million of transaction expenses in connection with the recently consummated acquisition of Ardent and Rabalais, as well as $1 million of incremental expenses inclusive of intangible asset amortization related to 2015 acquisitions.
Our quarterly organic increase in SG&A expenses is $3.7 million and is primarily due to increased employment costs as a result of higher headcount period-over-period, as well as increased legal costs due to litigation activity within the quarter. Reported operating income for the quarter is $55.6 million, represents 3.2% of revenues and compares to $55.3 million and 3.5% in 2015's first quarter. Our U.S. Electrical Construction Services segment operating income of $16.7 million is flat with the comparable 2015 period. Reported quarterly operating margin is 4.8%, which is 40 basis points lower than 2015's first quarter. The decrease in quarterly operating margin is due to losses on certain transportation projects recognized during the quarter. This segment's operating margin is depressed by revenues recognized during the period for which no profit is recognized due to such projects being written down to loss positions prior to 2016.
This is impacting first-quarter margins within this segment by approximately 20 basis points, and I am confident that you will see this segment's operating margin improve as we progress through the year. 2016's first quarter U.S. Mechanical Construction Services segment operating income of $23.9 million represents a $3 million increase from last year's quarter. This represents a 14.2% improvement quarter-over-quarter, primarily due to increased gross profit contributions from projects within the healthcare, hospitality, and institutional market sectors. Additionally, businesses acquired in 2015 contributed $700,000 of operating income, net of intangible asset amortization expense. This segment's operating margin of 3.9% is down 20 basis points from 2015's first quarter due to the mix of revenues and a large percentage of this quarter's activity representing projects in the early phases of completion. Our total U.S. construction business is reporting a 4.2% operating margin for the first quarter of 2016.
U.S. Building Services operating income of $13.9 million decreased $7.1 million from the $21 million reported in 2015's first quarter. Operating margin was 3.2%, as compared to 4.8% in the prior year period. Last year's first quarter benefited from $3 million of gross profit upon the settlement of a claim. 2016's performance was hindered by a less favorable revenue mix within the segment's Mechanical Services division, as well as the lack of snow in those geographies where we perform snow removal on an event basis. Lastly, this segment experienced an increase in their selling general and administrative expenses due to additional headcount, as well as increased bad debt and legal expenses. Our U.S. Industrial Services operating income of $18.9 million increased $6 million or 47%, compared to 2015's first quarter, with an operating margin of 7.3%, or 180 basis points higher than last year's 5.5% operating margin.
A spring turnaround season in the current year that looks more typical than 2015's strike-impacted first quarter, was enough to offset on an absolute dollar basis, the headwind associated with less shop services volume for the reasons provided during my revenue commentary. However, with the revenue mix more field services oriented, this segment's operating margin performance is still below what we would expect to see in what is typically a strong seasonal period. U.K. Building Services operating income of GBP 3.3 million represents 3.8% of revenues, which is an increase of approximately GBP 900,000 and is 110 basis points improvement over last year's first quarter. Lastly, on this slide, we used $37.2 million of cash in operations as compared to $17.8 million of cash used in operations during 2015's first quarter.
With the funding of our prior year's incentive compensation awards occurring during our first quarter, it historically represents our weakest cash flow quarter and was further impacted by an increase in payments made for income taxes related to the prior fiscal year. Finally, due to the extremely strong revenue growth experienced during the quarter, we funded working capital requirements, which will convert to cash as we progress during the year. We are now on slide eight. Additional key financial data for the quarter not addressed during my highlights summary are as follows. Quarter one gross profit of $223.1 million represents 12.8% of revenues, which has improved from the comparable 2015 quarter by $6.2 million.
The quarter-over-quarter reduction in gross margin was driven by domestic construction and U.S. Building Services margin compression due to revenue mix, and in the case of electrical construction, certain losses incurred on transportation projects that were recorded during the quarter, as previously referenced. Finally, last year's first quarter benefited from $3 million of gross profit upon the settlement of a claim within our U.S. Building Services segment, which I also highlighted during my Building Services segment operating income commentary. Diluted earnings per common share from continuing operations is $0.56 and compares to $0.52 for the quarters ending March 31, 2016 and 2015, respectively. On an adjusted basis, reflecting the add back of transaction costs, diluted earnings per common share from continuing operations would have been $0.57 for 2016 and represents an improvement of 9.6% quarter-over-quarter. Please turn to slide nine.
Tony touched upon the strength and liquidity of EMCOR's balance sheet during his earlier remarks. Our leverage continues to reduce and is represented by our debt to capitalization ratio of 17.3%. Our cash is reduced from year-end 2015, primarily due to the $37.2 million of cash used in operations previously referenced, as well as cash utilized to fund common stock repurchases, property, plant, and equipment additions, and our quarterly dividend payments. Working capital levels are up modestly since December 31, 2015, primarily due to a reduction in current liabilities as a result of reduced levels of accounts payable and accrued payroll and benefits due to the funding of prior year obligations in the first quarter of this year. Identifiable intangible assets have decreased solely due to quarterly amortization expense of approximately $9.5 million.
Total debt of $311.4 million is reduced from year-end 2015 due to the mandatory quarterly principal repayments under our term loan of approximately $4.4 million, offset by new capital lease additions during the period. Our quarterly changes in stockholders' equity are detailed on page five of our Form 10-Q filed this morning with the Securities and Exchange Commission, and there are no unusual items to note. With our closing of the Ardent/Rabalais acquisition subsequent to March 31, our debt levels have increased by approximately $200 million, and as a result, our debt to capitalization ratio now approximates 26%. We are happy with where our balance sheet is currently and comfortable with our leverage profile after giving effect to the most recent acquisitions. I believe we continue to be well-positioned to take advantage of all opportunities in front of us.
With my portion of this morning's presentation concluded, I would like to return the presentation to Tony. Tony?
Thanks, Mark. I'm on page 10, backlog by market sector. As you can see from the chart, backlog at the end of the first quarter is $3.85 billion, up $116 million, or a little over 3% from March 2015, and up 2% from December 31, 2015. As I said earlier in the call, bookings were strong in the quarter, especially given our strong revenue growth. Commercial backlog is flat from the year-ago period at almost $1.3 billion. It did increase from December 2015 levels by about 6%, as we won a number of projects in the $6 million-$10 million range. Good work for us, should turn for the most part this year, and demonstrates continued demand from this sector of the non-residential work market. We still think that the non-res market will grow mid-single digits in 2016 for the markets we serve.
Backlog in the industrial market sector is also up in the quarter, as in March, we had some success in our food process design build business, and we're doing a few milk drying plants, and we're really good at that. Food process work for us is a very successful design build business. Our team at Shambaugh & Son lead this work, really, I think I'm a little biased on this, but I can unequivocally say that they are the best in the business at it. They are technically excellent and when they build, they build with productivity and skill. We deliver a great result for our customers by providing a true turnkey food process solution. With that, I'd ask you to flip to page 11, and I'm going to do backlog by segment.
What you really see here is our domestic construction segments continue to rise from March 2015 by 4.6%. Really, that shows the continued strength in the non-res market. Our mechanical segment is really winning some nice work, and not only food processing that I described, but also in water and wastewater. Electrical has burned some work in the transportation infrastructure segment, and we have some pretty good work there, and we've had some difficulties. Some of the bigger work we're doing, we've had great success on. As we sit here today, we continue to see backlog to be healthy throughout the year in our construction segments. To set expectations, we expect continued revenue and backlog strength in our mechanical and electrical segments, and we also expect it in our mechanical services business.
It is always important to note, the small movements in backlog up or down in a quarter are not worth deriving trends from, but rather the long-term trajectory, which here has been very good. Backlog in building services is up compared both to the year-ago period and December 2015. Year-over-year, we saw overall growth in our mechanical services business and also our site-based group on the commercial side. We've had some decrease in our government backlog. Our industrial backlog supporting the fabrication, which really it's just the shop business, and we've covered this a lot. I'm not going to go into that a lot now. If people have questions, they can. Basically, we're not seeing a lot of increase in demand for our new build heat exchangers. If you look at it from the year-ago period, we're down to $57 million or down almost 40%.
We have done a lot of aggressive cost work in this business. We're focused on the better margin and unique applications here. We're not trying to dive down to the lowest points in the market. We still believe our shop business will be down year-over-year. However, as I mentioned earlier, we project a solid and very good year from our field groups. They're performing turnarounds, they're doing maintenance work, and our specialty services have really seen good demand. Again, our field work is performed for the most part on a time of material or unit price basis, and therefore is not included in backlog. Similar to the last couple of calls, we continue to win work. Our backlog reflects what is occurring in the end markets.
We've seen expansion in the construction market and expansion in the mechanical services market, supported by a growing non-residential market. Look, we've had retraction in the industrial market, industrial segment of our business, which is the new heat exchangers. We've had good growth in the industrial end market broadly. With that, I will turn to page 12 and 13. I'm going to turn to the full year. We acquired Ardent Rabalais and a mechanical services contractor in the Southeast here in early Q2. With that, we expect revenues to be at least $7.2 billion for 2016. We expect the acquisitions to give us at least $0.05 per diluted share from continuing operations and increase in the share. We're going to raise the lower end of our range on a pro forma basis from $2.70-$2.75 per diluted share from continuing operations.
This is on a pro forma basis. This will be adding back the transaction expenses from Ardent Rabalais, which for the most part will occur in Q2. Our new range on a pro forma basis is $2.75-$3 per diluted share from continuing operations. Again, that's on a pro forma basis. How do you move up in that range? Really hasn't changed a whole lot from the call we had on February 25th. We need good organic growth, we said, in our construction operations. We're having that. We need better conversion, and we expect that as the year progresses. Building service segments, we need it to rebound. You add all this stuff together, we not only didn't have the snow removal revenues, but with the unseasonably warm weather, our mechanical services mix went to more projects and less service.
For those of us who followed a long time know that the mechanical service repair work we do is one of the most profitable things we do at EMCOR. You add all that stuff together, it probably cost that segment about $0.04 a share in the quarter. The building services segment we expect to rebound, especially on the mechanical services side, and we also expect pretty good performance on our site-based side through the year, both government and commercial. We do need IDIQ demand to pick up through the year, but it usually picks up mid to late third quarter is when we see that volume come through. We had a good spring turnaround. We're in the middle of a, not in the middle, towards the tail end of a good spring turnaround season.
We need to have a good fall turnaround season in our industrial segment, and we need to continue to have strong demand for our specialty services like our welding services. Sitting here today, we expect a good fall turnaround season. We also expect the demand to continue for our specialty services for a while. We still have quite a bit of work to do to close the gap because of the drop in the new build heat exchangers. That gap's closing. The trajectory's in the right direction, but it's a business where you need to pay attention to your customers and react to the demand, and we're the best at it in the business. We need the U.K. to continue to have decent revenue growth. They can't focus on the exchange rate. That's our problem.
We need a better conversion as it adds on work, and they continue to win in the market. They are winning in some of the most demanding applications for integrated facilities management. Our restructuring work there, and we're seeing it sort of stabilize around the 3.5% level, and we expect to do better as we add more project work on our customers there. We need to have solid acquisition integration, especially with Ardent and Rabalais. It's off to a good start. These are terrific people. We bought a first-class management team that are really aligned with the core values at EMCOR, and we also are excited about the opportunities for the mechanical service contractor we bought in the Southeast. Together, we couldn't be more excited that these teams have joined us and are now part of the EMCOR family, we need to continue to integrate them.
Usually about six months out is when we see where they start to take advantage of the flexibility they'll now have as part of EMCOR to grow their businesses. We still see opportunities to grow organically, which we love to grow organically first, we continue to see opportunities to grow through acquisition. I think those that know how we view that, they happen when they happen. We don't force deals, and we also maintain our discipline through the acquisition process. Summarizing all that together, we had a decent quarter. Sure, we expect better drop-through, and we expect to get it as the year progresses. We're excited about the acquisitions we've made, and we like the trajectory of the revenue growth, especially in our construction segments.
Really, the creativity our folks in the industrial segments have shown in their ability to offer and respond to customer demand with the specialty services to really fill the gap from the tough hand that they have in the shops. With that, Teresa, I'll take questions and open up the line.
At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Alex Rygiel with FBR & Co..
Morning, Alex.
Morning.
Good morning, Tony and team. How's everybody doing?
Pretty good. How are you?
Tony, got to ask you the obvious right off the get-go. Why not raise the high end of your guidance by a nickel or a dime?
Alex, I think a lot of it comes to two things. We have a gap to fill in building services after the first quarter because of the lack of repair service work and the lack of snow revenues. Coupled with we like what we're seeing in the industrial market right now with our guys' ability, our team's ability to find new ways to serve their customers on an extended basis to make up for the shop. We'd like to see that for another quarter or quarter and a half before we declare victory there.
It's fair enough. Can you talk a little bit more about the two transportation jobs, how they're progressing? Remind us again when they're going to be done. Yeah.
I'll take off on this, and I'm going to ask Mark to get more specific with you. If you go, we have two, they should be done by the end of the year, what's really hurting us on those, and we had another two in the first quarter. These are all, for the most part, extended general conditions problems. I mean, that accomplishes probably 70% of what's going on here. We do expect to recoup some of that. That could be end of the year or into next year. As you know, at EMCOR, we're very conservative of how we think about that, because most of that's out of our hands and we'd rather present what we see happening versus what we hope to happen. Mark?
Yeah. Tony, the only thing I would add, Alex, this unfortunately is not a unique situation to us or a company like us. It's just coincidental that we had a couple of things late last year, that because of site conditions, through no fault of ours, has created some productivity difficulties. We had a couple of more pop up on the radar screen earlier this year. I guess the good news is it's not the same work that we were talking about in connection with Q3 and Q4 last year. The timelines, as Tony indicated, other than one project, are scheduled to be complete in calendar 2016. One of those projects actually, its completion date is in early 2017. Unfortunately, once things start to get deferred, I think you, as well as everyone on this call knows, it becomes out of our control.
Right now, we're hopeful that everything is going to complete under the revised completion deadlines. It would not be unusual for them to slide to the right, so to speak. Obviously, we've taken that into effect when we looked at our revised cost estimates.
We didn't assume that everything was going to be great and finish on time, like not on time, on the extended time that they were saying. We got more conservative.
Tony, last question, and it's a little bit more macro, but what do you think we need to kind of really jumpstart growth here?
Well, Alex, if I could have the kind of growth we had in the first quarter and have that carry through the year, I'd be really happy. I think growth is coming in our business. I think your more macro question is, where do we see the pockets of growth long term where EMCOR can really grow both organically and through acquisition? Kicking it up a level, I think, what we've been able to do on the industrial side over the last 8 quarters really is pretty remarkable if you look at that overall growth. Mid to teens to high teens, all organic after we bought Repcon Strickland, which means we're winning in the market. The other sign of that, you take that segment specifically, is here you have this really depression in the shop business on the new build side. There's no other way to term it.
Because of our market position and because of the services we can offer, here we turn in a very good first quarter. Some of that's year-over-year with the refinery operator strike, but a lot of it is we were able to offer more services to customer that need those services, and we're known as the go-to people to get some very highly skilled labor. You move to the construction side. I think, we have some unique capabilities in some markets. You can take South Florida, for example, where we have unique capabilities on the water and wastewater side. There's going to be a lot of money spent down there, and we're in position to help our customers meet the mandates that they're required to meet from the EPA.
You look at the commercial market, I don't think anybody's more well-positioned than we are, whether it be new build or retrofit. I think that's both electrically. Now we've added real capability in Ardent Rabalais to serve the downstream industrial market and downstream petrochemical market, but also the broader industrial market. In markets that we weren't really in, which is great industrial markets electrically, Texas, Louisiana, and the mid area. If you think about what we bought, we paid for what it does today. We bought one heck of an option on upstream and offshore oil and gas production. These guys are good, and when that market comes back, which it invariably will, they'll be able to participate in it. Of course, mechanically, I think we go unrivaled with some of the large food process work, which you'll start seeing materialize.
That team in Shambaugh is as good as it gets. We've added to that capability. Fire protection, the same thing. In switching to building services, we feel very good about the trajectory of our mechanical services business. Our site-based and government business are holding their own in difficult markets. The mechanical service business, we just added to through acquisition, and we've always had great success in growing those companies after acquisition. You say jumpstart growth. I agree with you. We have the ability, I think, with our capabilities, to continue to grow strong. You're one of the more seasoned analysts, and you understand that we see it in backlog a lot of times on the construction side. On the other side, we don't see it in backlog. Overall, good print in the first quarter.
I'd like to see more of that a year go on. EMCOR could be a $7.2 billion company at the end of the year with better drop-through, I think we'd all be happy.
That's very helpful. Good luck.
Your next question comes from the line of Adam Thalhimer with BB&T Capital.
Morning.
Hey, good morning, guys. Morning, Adam.
Mark, what was the impact from the two new transportation jobs in Q1?
From an operating margin perspective, it negatively impacted the electrical segment approximately 90 basis points, on a consolidated basis, it impacted it 20 basis points.
Got it. Great. Tony, what are you seeing in the bigger metros like New York that led the non-res recovery? Are those starting to peak, or are you still seeing new opportunities in those kind of markets?
We still see new opportunities. In New York proper, we do quite a bit of apartment work and things in New Jersey. New York proper, the residential high-rise market's driven a lot of that. We don't do a lot of that work. It's actually become a non-union game. You might find that hard to believe in New York, but it is. I think the New York office market is still pretty strong. With some of these buildings they've built, there'll be some tenant fit-out opportunities. I think the infrastructure market's still strong. It's challenging. We're doing really well on some of the work, and we're not doing as well on some, and Mark went through the reasons why. I think it's still pretty strong. New York's a massive market.
Of course LaGuardia is coming in, and we're not looking to do the whole thing, but maybe we'll do some infrastructure work there. I think New York's okay. I could go market by market with you. I think the general trend is overall the non-res market is pretty healthy. We've been sort of saying mid-single digit growth. I think that's going to play out this year. I think it's really been about there when you strip out some of the large transportation projects and civil jobs and some of the power jobs over the last couple of years in industrial. I think it's steady as it goes for now. I don't think there's a big thrust coming there that's going to cause it to grow much above that. Could be wrong, but I think that's what we see right now.
Okay.
Mark? Okay.
Well, that's good. On the Ardent acquisition, is that all in the industrial segment or is some of that going to hit mechanical? Is there any seasonality to that business?
It'll all be in the electrical segment. Where it participates is in the industrial market. The reason we put it in the electrical segment, because of the kind of work it does, we're very familiar with their work. The folks that run our electrical segment know a lot about that work. We do that work today out west, in the Rocky Mountain region and in California.
Okay. Is that going to pull the margins up a little bit in the electrical segment?
I think over the long term it could. We got some amortization we've got to work through over the next year.
Okay. Just lastly, the food processing work that you mentioned, you had some of that that flowed through back in 2012. Can you compare what you're seeing today in that segment to what you had back then?
It's good work, just like that work, we think. The difference was that work never went into backlog, and it all was very rapid, and happened within 12 months. This will be more traditional over almost two years.
Perfect. Thanks so much.
Your next question comes from the line of Tahira Afzal with KeyBanc.
Morning, T.
Hi, guys. How are you?
We're good. How are you?
I'm doing well, thanks. The first question is, Tony, when we talked a couple of quarters ago, we were looking really for nice revenue growth for operating margins to really move beyond the mid 4% range that they've been stuck in. Now we're seeing some sort of benefit increases and a couple of execution hiccups. What would it take to get margins sustainably higher at this point?
I think the biggest thing is we can't have the drag from some of the jobs we had towards the end of last year and this year. Other than that, if you look at our book of business, it's okay. I will say this, if you look broader, with labor getting tighter, you'd expect margins to get a little better in the bidding margins. They've gotten better, but they haven't got as strong as we would have liked to have seen it maybe five quarters ago. We have to out execute. We have a pretty good record of that. Usually when we run into, like most contractors, it's not our fault, but usually in our case, it's not our fault. We do a lot of really good planning.
You run into some of these larger jobs, you get into the situation where there's a lot of things at play in that, from permitting to access to timing, and we don't assume 100% recovery like some people do. We assume almost none initially.
Right
because so much of it's out of our hands. That's why you see spikes in our margins at times when we settle these things. I think we'll start to see the drop-through as the year goes on, T. Unfortunately, I think this year, in our construction operation, it's going to be a more third and fourth quarter phenomenon, as some of this large work starts to play out as the year progresses.
Got it. Okay, Tony. On that note, going back to those transportation projects, I assume one of them might have been one that's somewhere in the New York vicinity. From my experience, delays from projects such as those can multiply over a long time. How confident are you, and what have you baked into your estimates in terms of the recovery there? I know you said you expect margins to bounce back there, but, do you feel you've built a sufficient delay cushion for incremental delays?
Well, I'm going to answer, obviously, we think yes, because we put the provision there. The work that we have, the largest project we're doing in New York is not one of them that are suffering this right now. It's actually turning out to be a pretty good job so far. We think we captured it all. We took in a more negative view than what the general contractor gave us for a time horizon, and we'll see where that ends. We don't tend to be optimistic people once we get in one of those situations. About best to say it, we get it. We've seen the movie. Mark?
Nothing more to add, T, other than that we obviously have been very realistic in our assessment of how these projects are progressing, and once again, I will add, and this isn't an excuse, but having idle labor on a job, being idled through no fault of our own isn't the greatest job situation, and I think, if that does not continue to replicate itself beyond the time frames we're talking about, we should be fine with what we have. I think the other point, and Tony mentioned this, and I mentioned this as well in our prepared commentary, these projects will continue to burn revenue throughout the rest of the year with no profit. That will drag on margins. It's not that there's going to be additional write-downs, but you're going to have revenue with no profit recognized.
That in its own right impacted us 20 basis points within the electrical segment in the first quarter. We're hopeful that the other work that's being executed will mute the impact of that as we go forward over the next couple of quarters. It will have a little bit of a drag.
I mean, really, when you put the two together that Mark talked about, I think you get almost 100 basis points. 110 basis points. You can understand how strong the underlying business really is.
I know, that I'm sure is frustrating for you guys as well. I guess what I'm trying to understand is what the lessons learned are. You've got some pretty big projects on the transportation side, as you mentioned, Tony.
Some of the best work we've ever done at EMCOR has been at the transportation segment. With the companies that are executing the work today, with the same people that are doing these jobs. The lesson learned is you got to stay on top of it, which we are. I also don't expect this is where these jobs will end up. We're going to get aggressive in our recovery, you can't assume that's going to happen when we make our estimates. We're just not in the habit of doing that. Some of the best work that we've ever seen at EMCOR, most profitable jobs we've ever done, award-winning jobs, have been in this segment with this team. I feel pretty confident that the lesson learned is you have to be aggressive, and you got to seek productivity.
I don't think in these cases that it's a lesson that we're relearning here. These folks know what they're doing. They bid the jobs appropriately, and we expect them to finish them, and we'll try to recover. These are the same folks that brought us terrific work at great margins in the past and have been a big part of EMCOR.
Got it, Tony. That helps. Thanks.
Your next question comes from the line of Nick Capuano with Thompson Research Group.
Good morning, this is Steven Ramsey on from Nick. On transportation, thinking bigger picture, is the new long-term federal highway bill impacting your transportation business? If so, how should we think about the size and timing of that impact?
Well, again, we don't do civil work. The only place we'll participate in that is in electrical infrastructure work. Again, it's been some good projects. We really won't have visibility on that until a year from now. Again, like I just mentioned, some of the best work we've done has been in those infrastructure works around new highways and toll roads, and we'll still be good at in the future. We'll see where the work pops up and whether we can earn an acceptable return versus who else is bidding on it.
All right. Switching to the U.S. Electrical Construction business. On the Q4 call, you were talking about that segment reaching a 6.5-ish operating margin level in fiscal year 2016. Do you expect that still to happen, or what needs to happen in the next six to eight months this year to make that happen?
We expect the margin to recover as the year goes on. We'll have some of this headwind. If the margin percentages aren't there, we hope that the growth will make up for it and the margin dollars will be there, and we'll make what we said we would do.
All right, excellent. My last question. On the Q4 call as well, you talked about how you were concerned about visibility into the second half of this year. Is that still the case, or do you have some increased visibility about what that will look like? Thank you.
I think the non-res market will continue to be strong in mid-single digits. We take that as strong now. In a half percent GDP environment, that's a winner. I think we have better clarity today in the industrial because we printed a pretty good first quarter in our industrial segment. The small project work we think will be strong, but we got to execute it, and we got to get it into backlog. Visibility is a little bit better, as you would expect 3 to 4 months into the year. We'll know a whole lot more on the second quarter call than we know today.
Excellent. Thank you, guys.
Your next question comes from the line of John Rogers with D.A. Davidson.
Hi, good morning.
Morning, John.
Couple of things, maybe for Mark. The acquisition costs that you're expecting in the second quarter, how much is that?
Yeah, when we had released the acquisition, we had given a range of $4 million-$5 million.
Right.
You can see that we incurred $1 million in the first quarter. We're going to be probably at the lower end of that range. Those costs will all be recognized in Q2.
Okay. In terms of the tax rate you're expecting this year, should it be in that 36% range?
No. We had originally talked about, with regards to 2016 guidance, approximately 38%.
Right.
Obviously, with a favorable discrete item in the first quarter, that rate now on an annual basis is going to drop to roughly 37.5%.
Perfect.
You'll see a higher rate in Q2 and Q3, obviously, because our estimate still is our estimate for the year because it's without that discrete item. When we get through the full calendar year, it'll be roughly 37.5%.
Okay. Tony, looking at your business over the last couple of years, it seems as if it has varied quarter-to-quarter, but you've had some better results out of the mechanical business, and I know some of this is disguised by margins versus the electrical business. Is there anything going on in terms of trends in there that makes one different than what we saw maybe in the last cycle, 2007, 2008, when it seemed like the electrical business had been stronger? Is it just opportunities or the types of projects?
I think it's a mix, John. We've added to that mix through some pretty good acquisitions on the industrial side. We've built capability on the fire protection side. Our fire protection businesses are going well. We're now at full strength there as far as we're buying into those markets in the last cycle, now we're in those markets, and we've grown them organically. Fire protection is one of the better things we've done. We've also, I think, have become very good at a couple different things. The mechanical guys are the ones that have really benefited from this whole BIM movement in building information modeling, which then leads to better pre-planning and better pre-fab. Really, the mechanical folks have been at the center of that. They've gotten more labor productivity than they had in the last cycle. There's some process points around that.
There are some market points. We've built capability in our mechanical team because of design assist, because of some of the other work, and because of the move toward more industrial work, to have a chance to improve margins. As a result of that, you have a better mix this cycle than you had the last cycle. Put all that together, I think that's why you've seen the improvement in the mechanical. The electrical continues to be a very good business for us. We don't expect long-term margins to be where they are here in the first quarter. We had 6% in 2015, and we'll do at least that. Someone said 6.5%. There would be no reason to believe we can't get back up there.
Okay.
The electrical business is a little different. It gets productivity somewhat from pre-fab, doesn't have the same opportunities. In our electrical business, we benefit a little more from the large project work than we do on the mechanical side. All those things we were talking about, the infrastructure work, when we hit the higher margin periods, typically it's when we're doing that kind of work and once those jobs finish. Put all that together, that's what's going on in the two businesses.
Okay. Appreciate the color. Are you seeing a threat from OEMs? At different times, talk about trying to push in, especially to the services side.
No.
I think with kind of mixed results.
Yeah, I think they've had mixed results. Look, one of the happiest day for a really good service contractor is when the only other competitor on the job is an OEM, not because they're not good competitors, it's because they're a little more disciplined than some lower-end contractors. EMCOR is the largest mechanical service contractor, I think, in the country now.
Maybe the combination of Johnson Controls with all the combinations of stuff going there, we've lost visibility. As an independent, we're the biggest. I know we're bigger than either Trane or Carrier by a lot. We have it two places, John, in our financial statements. You see it in building services. In our construction mechanical segment, we think, guys, probably 15%-18% of that business is pure service.
Sure.
We're unity of command guys. They're running the overall business. If it's a construction business, they have a service arm, we leave it in that segment. That's where it belongs because that's who's running it. We have a very strong service business, and we do all kinda great things in that service business, from handheld technology to GPS to distance. We actually get technicians linked together when they're trying to fix something unique, like a PLC controller or a certain kind of chiller. We're innovators. A lot of new products will come through us. Some of the new compressor technology from companies like Turbocor, that was all tried by EMCOR technicians first with our customers. It drives big efficiencies. We're probably the best implementer of energy efficiency projects in the country, and we're also the largest independent controls contractor.
We have a terrific franchise in mechanical service, I think it earns very good margins when you look at it as a business. It's a business that we continue, we just made that acquisition. We'll continue to look to grow both organically, which we've grown probably mid-single digits over 15 years, and through acquisition. It's a place we're good at, and we still have white space on the map.
Okay. Last thing, if I could, just on the industrial services business. You talked about the shop services and what you were seeing there, is this just, in your mind, a function of the energy markets? Is that what we need before we're going to see a recovery in there? Conversely, if we don't see a recovery, is there a significant project or margin risk in that segment?
No. Not from where we are today.
Okay. On the energy side of it, is that what's required?
Look, I think that.
You talked about in the past higher single-digit margins there, the 10.
Yeah, I think the shop business comes back when oil prices go up a little bit. They don't need to get back up to $80 to make that happen. $60 could. Look, our guys aren't sitting still either.
We service other parts of the energy space, whether it be LNG terminals, they have a lot of heat exchangers. We service pipelines, we service the petrochem. Yeah, we need to really get back to where it could be margin-wise. We need that business to come back because the repair business could still be there, and it's decent margin. John, what that OEM business does, it allows us to load our shops and get absorption. These aren't big shops, but you get absorption, and that allows the repair business to even be better. Again, our guys aren't sitting still. Our cleaning operation is doing very well. We're looking to expand the specialty field services. Crack spreads look like they're going to be good for a while. Refinery utilization's high. Petrochem's expanding.
If we can't make it in the shop, we got to find a way to make it in the field, and we got a really good team that thinks about this every day, and we're not rookies at it anymore either. We've been doing it a while, too.
Thanks for the color.
Yep.
Your next question comes from the line of Noelle Dilts with Stifel.
Morning, Noelle.
Thanks. Good morning. How are you?
Good. How are you doing?
Good. My first question does tie into what John was just asking about a bit, on the industrial side. I'm just curious as to your thoughts on how the fall turnaround season is shaping up and your thoughts on 2017, and if you think we're going to start to see more large full-scale turnarounds.
We had some pretty significant turnarounds here in the spring. We have more significant ones scheduled for the fall. When other people talk about this, and we are very careful with this is dependent on who your customers are, where their plants are, and what you want. We see a decent fall turnaround season. It is too early to talk about spring. Those plans will start to solidify somewhere between August and October, and a lot of it gets around manpower planning. We think fall will be fine. We are towards the tail end of a pretty good spring turnaround season, and we should be starting up the fall sometime in early Q3.
Okay. Just generally on non-res, very high level, a lot of the leading indicators have been a bit mixed here in the first quarter. We have heard from some experts that they think 2017 could slow a bit. I know it is early, but do you have any preliminary thoughts on 2017 and how that might shape up?
Do not really know much about 2017. We expect 2016 to have good mid-single digit growth. I think because of the slow pace of this recovery, I would be very surprised if we have an abrupt shift unless there is a huge macro event that drives that.
Okay. Finally, Mark mentioned that on the heels of Ardent, you are still in a good position to take advantage of all opportunities. Could you just comment a bit on your appetite here for acquisitions, repurchase, organic investments, how you are kind of thinking about the use of capital?
We were pretty aggressive on the repurchase front in the fourth quarter because we knew we were having a very good cash flow year, and there wasn't an immediate acquisition that would stretch our balance sheet, so we took advantage of that. We've always committed to shareholders that we would not let dilution happen from the year-ago period. We took care of most of that here in the first quarter. Share repurchase for us is, really, we put all that together, capital availability. We're not speculators in our stock. I guess if there was a big dislocation, maybe we'd be a little more aggressive. We're not speculators in our stock. We don't even try to do that. We think about share repurchase as return cash to shareholders. Right now, we just made a really decent sized acquisition we got to integrate.
If something came along, like an Ardent Rabalais, we would take a hard look at it.
We looked at this acquisition for three years, and the timing finally got right. We looked at the one we bought in North Carolina, the Southeast. We looked at that for two and a half years and talked. We tend to be patient. We don't control the timing of them, but we're ready to take advantage when we can. I guess our first thing would be, we'll generate cash this year. We'll look to pay down some debt on our revolver. As the year progresses, maybe we'll be opportunistic on share repurchase. We'll hold some powder for acquisition. I don't think anything's really changed.
Okay. Then if I could squeeze one last in. You mentioned previously at least $0.10 of accretion from Ardent, previously. Any refinement there, given that the acquisition is now closed?
I'll let Mark talk about it. We were talking out into 2017, I think, in the press release.
Yeah. Sorry, into 2017. Yep.
Yeah.
Exactly.
This is what we see in 2016 right now. The reality, Noelle, I'll kick it over to Mark. You all are going to know exactly what we made because the strongest periods are the end of second quarter, third quarter, the beginning of fourth. When we do our third quarter call, you're going to have a pretty good idea what we did this year, we'll have a pretty good indication of what it can do next year. You're going to know that just by seeing what it did this year.
Okay.
Yeah, I think, clearly, Noelle, within the brief period of time that we've owned Ardent Rabalais, we haven't seen anything that would cause us to retract what we had previously communicated with regards to 2017. The fact that we were successful in getting it closed early in the calendar 2016, we're probably more optimistic than pessimistic about what kind of impact we all collectively could have together, be it that we're all part of the same company now. What we've learned in these kind of purchases, though, is these folks have been involved in this case, a lengthy sale process. They've run a good business while they were doing it. They love being contractors. They love being industrial electrical contractors focused downstream in other industrial markets. They've had to take a chunk of their time and be involved in the sale process.
We learned this when we did Repcon Strickland, and we learned when we did Ohmstede. About six months after is where we really start to see them take hold because they're back out doing things to grow their business with that extra time that they have now. Our experience has been, if you go back to Repcon Strickland, we don't expect that well with Ardent Rabalais, but we really saw the momentum pick up about six months into the acquisition as people that are really, really good at what they do, now part of the EMCOR family, where we tend to be supporters of what they want to do when we get the business plan and think through it. We understand the business.
Usually, they're coming from owners, that no offense, they wouldn't know the difference between the outlet in their house and the outlet that they put in, and what industrial electricians do and how they staff, and how do you need to support them, and what the safety programs look like, and scale matters and the working capital. They feel relieved to be away from a financial buyer, and usually, we see the benefits of that 6-12 months out as we start to really think about how we grow the business. We're excited about it.
Great. Thank you. That's really helpful.
Okay. That's it. Look, we think we had a pretty good first quarter. We like the revenue growth, need better conversion. Top level, our construction business is converting backlog into revenue growth. Thrilled to have the Ardent Rabalais people and the folks from the Southeast contractor with us now. We like what's happening with the creativeness of our industrial guys to be able to fill in that drop in demand in the shop services with other services. Our mechanical service business, we expect to perform for the year, and we expect our site-based and government business to hold their own and maybe do a little better. We'll fill some of that gap in building services, and we need our other businesses to convert.
We think we have a pretty good guidance range out there, and we'll see some of you out while we're talking to investors, and the rest of you, we'll talk to in July. Thank you all very much.