Earnings Call: Q3 2015

Oct 29, 2015

Good morning. My name is Janisha, and I will be your conference operator today. At this time, I would like to welcome everyone the EMCORE Group Third Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you, Ms. Michelle Bittman, With FTI Consulting, you may begin. Thank you, Kanisha, and good morning, everyone. Welcome to the EMCAR Group conference call. We are here today to discuss the company's 2015 third quarter results, which were reported this morning. I would like to turn the call over to Kevin Matt, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead. Thank you, Michelle, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the third quarter of 2015. For those of you who are accessing the call via the Internet and our website, welcome, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. Please advance to 2015 results. They are Tony Guzzi, our President and Chief Executive Officer Mark Pompa, Executive Vice President and Chief Financial Officer, Mava Heffler, Vice President, Marketing And Communications and our Executive Vice President, General Counsel, Sheldon Kamiker. 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 reception as of this date and EMCOR assumes no obligation to update any such forward looking statements. These forward looking statements involve risks and uncertainties that could cause actual 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 other risks and factors associated with EMCOR's business are also discussed in the company's 2014 Form 10 K and in other reports filed from time to time with the Securities And Exchange Commission. With that said, please let me call the let me turn the I'm sorry, with that said, please let me turn the call over to Tony. Tony? Thanks, Kevin. And I'm going to be on pages 2 through 5 for the first part of this discussion. First of all, good morning, and thanks for your interest in EMCOR. Look, we had a very good third quarter here at EMCOR. My discussion, I'm going to focus on the quarter. As Mark's going to cover both the quarter and the year to date in detail. In my discussion, I will be talking pro form a numbers which excludes the sale of a building last year, and the focus will be on continuing operations. We earned $0.66 per diluted share versus $0.57 in the year ago period. We had revenues of $1,700,000,000 with underlying organic growth of 8.3 percent. That is our strongest revenue third quarter ever. We also had a book to bill of 1.1 and backlog grew despite this very strong organic We had operating margins of 4.1% compared to 3.9% in the year ago period, and operating income grew 13.1%. Operating cash flow from continuing operations was strong in Q3 at $100,000,000 versus $69,000,000 in the year ago period. And that is in the face of very strong organic growth so great cash flow performance. I'm now going to cover some segment highlights. Our construction segment revenues grew organic fleet at 5.7% when you put the 2 together. Electrical grew at 9.4% organically and mechanical at 3.6%. We expected this growth in Electrical as we had really good backlog build. Mechanical also continue to see growth as this backlog also has grown. We had good operating income growth in Electrical at 23%. We did have some contraction in mechanical versus the respective year ago period But as we have said many, many times, these are not quarter to quarter businesses. The trajectory is good in both of these businesses, segments as they have and are participating in a strengthening nonresidential recovery. At 5.6% operating margins on a combined basis. Our construction businesses continue their strong performance through the year. We have Building Services had a decent quarter, but had a tough set of comps and 3rd quarter 4th quarter last year were strong in our government business, as we wrapped up the 2 large site based contracts that we lost on rebid early in 2014. And we've discussed this many times. We continue to see very strong momentum in our Mechanical Services business. We continue to have improved IDIQ work in our government business but it wasn't enough to offset these contract losses in the quarter for the year to date periods or the year to date periods. We had steady and improved performance in our for the year. Our Industrial businesses had a very strong quarter with 40% organic revenue growth and operating profit that nearly doubled. This performance is driven most specifically, our rep constrictland team, who are on track to have a record year. Our Olmstead Field businesses had a more typical Q3 and it for the brunt of the strike impact earlier in the year. As we discussed in our Q2 conference call, We are seeing pressure in our shop business in our industrial segment. Our shops remain profitable, but the new OEM heat exchanger that once built for new applications or major retrofits remain under pressure from both the volume. There's less equipment bidding out there. And as a result of reduced volumes, pricing competition has accelerated. You can see this in our backlog in this segment, which was we have discussed many times is really just the new build heat exchangers. It has dropped from $97,000,000 in the year ago period to $72,000,000 this quarter. I'm going to discuss the overall trends for the remainder of the year, of that business, and all our businesses in our outlook section when we wrap it up. In our UK business, we continue to see strength now that 0.7% despite foreign exchange headwinds. And we grew operating profits at almost 9% and lost at least that in FX impact and converted in the range at 3.5 percent operating profit margins, which is what we laid out for investors and for ourselves when we undertook the restructuring of the business. We have won several new large contracts early in 2015. We're performing well on those contracts, and we are beginning to see our way to sustain levels of performance at the level we're at now. Our backlog grew in the quarter when compared against the year ago period and from year end 2014 at almost $3,800,000,000. We are at our highest level of backlog since mid-twenty 18. We liked the mix of our backlog at Building Services, UK And Construction. We do wish that we were not losing backlog for our Industrial segment's shops. Our balance sheet remains liquid and strong and we have confidence in the of our shares. And with that, I will turn it over to Mark. Thank you, Tony, and good morning to everyone participating on the call today. For those participating via the webcast, we are now on Slide 6. As Tony just indicated in his opening commentary, I will provide a detailed discussion of our third quarter results before moving to year to date key financial data derived from our consolidated financial statements included in both our earnings release Securities And Exchange Commission earlier this morning. So let's get started with our 3rd quarter performance. Obviously, some of this will be redundant to what Tony just said. I want to make sure we wrap a bow around it so everybody knows what happens. Consolidated revenues of $1,700,000,000 in quarter 3 are up $132,400,000 or 8.5 percent. All reportable segments are reporting increased revenues quarter over quarter. Our 3rd quarter include $1,700,000 of revenues attributable to an acquisition within our U. S. Mechanical Construction Services segment, and therefore, our organic revenue growth for the quarter is 8.3 percent. U. S. Electrical Construction revenues increased 9.4 percent to $344,400,000, Consistent with the revenue performance in the 2nd quarter, this segment's growth is due to greater project activity within the commercial healthcare and transportation market sectors, as well as an increase September 30, 2015, when compared to dollars or 3.9 percent. This quarterly increase is due to higher revenues within the manufacturing and commercial market sectors. We anticipate this segment will continue to generate consistent revenue growth as it is experiencing the largest increase in contract backlog of all of our reportable segments. EMCOR's total domestic construction business third quarter revenues increased $52,000,000 or approximately 5.9 percent. U. S. Building Services revenues of $428,300,000 increased to modest $700,000 or 0.2%. This is despite the headwinds associated with the loss of 2 government contracts completed in 2014, that were not renewed pursuant to rebid due to pricing and non EMCOR's performance, which Tony referenced in his opening commentary and we have collectively mentioned in each of the last three earnings calls. Although only reporting a modest revenue increase, this quarter represents the 2nd consecutive quarter of revenue growth for our Building Services segment, which previously had not reported any revenue growth since the third quarter of 2013. With approximately $15,000,000 of revenues not replaced from 2014's third quarter, we are encouraged by the progress this segment has made. U. S. Industrial Services revenues increased $69,500,000 or 40.3 percent due to capital and maintenance project activity from our industrial field services operations. Inclusive of turnaround activities. United Kingdom Building Services revenues of $97,000,000 increased $10,200,000 or 11.7 percent despite the headwind of the weakening British pound resulting in a quarter over quarter unfavorable exchange rate impact of $7,600,000. Consistent with their 2nd quarter's rent, the increase in revenues is due both to new multi year contract awards, as well as expansion of small project activity. Please turn to Slide 7. Selling, general and administrative expenses of $165,100,000 represent 9.7 percent of revenues and an increase $5,100,000 from quarter 3 2014. However, as a percentage of revenues, the current quarter declined 50 basis points from the 10.2% reported last year. On a sequential basis, this quarter represents our lowest level of SG and A as a percentage of revenue of any quarter in 2015. Our 3rd quarter is inclusive of $300,000 of incremental expenses related to an acquisition resulting in an organic increase as well as increased costs pertaining to our medical insurance programs. Operating income of $70,000,000 represents 4.1 percent of revenues and compares to 73 point $6,000,000 4.7 percent of revenues in 2014's 3rd quarter. Please note that last year's 3rd quarter was inclusive of $11,700,000 gain on the sale of building resulting in a favorable 70 basis point impact on the comparative 2014 third quarter. Our U. S. Electrical Construction Services segment operating margin to 7.4%. The overall improvement in this segment's quarterly operating performance is due to increased gross profit contributions from commercial and healthcare projects. U. S. Mechanical Construction Services quarterly operating income of $26,900,000 represents a 3,300,000 decrease from last year's quarter. Reported quarterly operating margin is revenue growth generated by this segment during the quarter, we did not benefit from the same level of execution as we did during our second quarter And as a result, we did not see quarter over quarter operating income improvement. With the strong growth in this reportable segment's backlog, we are confident in mechanical construction's ability continue to improve their performance as they have on a year to date basis through September 30. Our total U. S. Construction business is reporting an improvement of 1,600,000 or 3.1% over last year's third quarter with a slight reduction of 20 basis points in operating margin to 5.6% for the current quarter. Operating income for U. S. Building Services decreased approximately $3,400,000 to $16,000,000 of 3.7 percent of revenues, As I addressed during my revenue commentary, this segment's results have been negatively impacted by the headwinds associated with the loss of 2 government contracts, completed in 2014 that were not renewed pursuant to rebid as we approach the completion of this contract work in 20 14, we had a significant amount of IDIQ project work in process, which as most of you know, tends to have a higher margin profile than the base maintenance revenues to which it relates. As a result, this quarter over quarter decline of approximately $2,400,000 was additive to Services division due to an unfavorable change in revenue mix between projects and service. R and D services segment is reporting $14,300,000 of operating income or 5.9 percent of revenues. The 3rd quarter increase is due to increased revenue levels corresponding operating income from our project activity that continued from the 2nd quarter. The improvement in field services operating income offset reduced income from the segment's shop services business which is being caused by reduced pricing driven by the market impact of lower crude oil prices. As capital spending is being curtailed by most of the integrated oil companies, pricing on new build heat exchanger orders has contracted due to excess manufacturing capacity in the marketplace. Despite this headwind, the Industrial segment was able to leverage their overhead structure, which as a reminder has the highest overhead cost structure of any of EMCOR's reportable segments, and generated 160 basis point improvement in quarter over quarter operating margin. UK Building Services operating income of 3 point $4,000,000 represents 3.5 percent of revenues, which is an increase of approximately $300,000 and is essentially flat from an operating margin comparison corresponding 2014 quarter. Lastly, on this slide, cash provided by operations is $101,600,000 for the 3rd quarter, and is $95,600,000 through the 1st 9 months of the year. We continue to see favorable cash conversion despite the increased levels of working capital required. Fund or organic revenue growth. We are now on Slide 8. Additional key financial data on the slide not addressed during my highlight summary as follows. Quarter 3 gross profit of $235,400,000 represents 13.9 percent of revenues, which has improved from the comparable 2014 period by $13,200,000. The quarter over quarter reduction in gross margin was driven by and Industrial Services gross margins due to revenue mix. And in the case of U. S. Mechanical construction, certain project write downs that were recorded during the quarter. Total restructuring costs were $301,000 as compared to $398,000 in 20fourteen's 3rd quarter, Delitter earnings per common share from continuing operations is $0.66 as compared to $0.68 for the quarter's ending September 30, 2015, 2014, respectfully. On an adjusted basis, reflecting the removal of the gain on sale of building in 20fourteen's third quarter, diluted earnings per common share from continuing operations would have been $0.57 per share for 2014 compared to the $0.66 per diluted share we are currently reporting, an improvement of 15.8% quarter over quarter. Lastly, I would be remiss and Tony certainly did mention this that the results of our operation for the third quarter of 2015 set new company records a third quarter in regards to both consolidated revenues as well as gross profit. Please turn to Slide 9. With the quarter out of the way, I would like to discuss our results for the 9 month period ended September 30, 2015. Revenues of $4,940,000,000 are up $230,700,000 as compared to $4,710,000,000 of revenues in the prior year period. All reportable segments are reporting organic revenue growth year over year as both our second and third quarter performance has more than made up for our slow revenue start to the year. Year to date gross profit of $691,900,000 is greater than the representative 14 period by $33,200,000 and is consistent on a gross margin basis at 14%. Selling general and administrative expenses of $488,100,000 represent 9.9 percent of revenues compared to $454,200,000 or 9 6% of revenues in 2014. On a sequential basis, our SG and A as a percentage of revenues has decreased in each of the last two quarters, and on a year to date basis have finally dropped below 10%. However, as I mentioned earlier in this call, as well as on our previous call, Our Industrial Services segment has a higher overhead cost structure than EMCOR's other businesses, and as a result of their commensurate revenue growth in terms of absolute dollars, as well as a percentage of total EMCOR consolidated revenues that has resulted in an increase in our overall SG and A as a percentage of revenues. Restructuring activity is relatively flat between the 2 9 month periods. Year to date operating income is $203,000,000 or 4.1 percent of revenues, and represents a $12,400,000 decrease over 2014's year to date performance, 2014's year to date Operating income performance is inclusive of the $11,700,000 gain on sale of building, cited numerous times during this call and previous calls, And on an adjusted basis, removing the gain and sale of building from 20fourteen's results, the year over year variance is approximately $600,000 unfavorable as we have essentially closed the operating income gap on a pro form a basis that was generated due to both the nationwide refinery operator strike that impacted our Industrial Services segment as well as the impact of weather on our construction operations during the first quarter of 20 team. All segments are reporting higher operating income year over year except for UK Building Services, which in 20 14 benefited from a $4,800,000 benefited from $4,800,000 of income associated with a reduction of certain accrued contract costs that were no longer expected to be incurred. Reported diluted earnings per common share from continuing operations were $1.92 in each 9 month period, on an adjusted basis, excluding the impact of the gain on building sale 2014 year to date adjusted diluted earnings per share, would be $1.82 as compared to $20151 per share, representing a 5.5% increase year over year. Lastly, on this slide, as I had previously benchmarks with our third quarter performance, I would like to point out that the results of operations the year to date period set new company records in regards to consolidated revenues, gross profit, and diluted earnings per share from continuing operations for the 1st 9 months of any year. Please turn to Slide 10. Tony touched upon the strength and liquidity of EMCOR's balance sheet during his earlier remarks, as our leverage continues to cash and financing activities during 2015 than during the comparable 2014 period. Working capital levels have increased the end of 2014 due to the increase in accounts receivable as a result of our organic revenue increases during the last two quarters. Changes in goodwill and an identifiable intangible asset balances reflect the minor impact of the acquisition made during the second quarter. As well as $28,400,000 of year to date intangible amortization expense. Total debt is approximately $322,000,000 with the change from December 31, 2014, primarily attributable to mandatory quarterly debt repayments for the same period as it was partially offset by common stock repurchases and dividends, as well as cash distributions to our minority interest joint venture partners, as we close out the related joint venture entities. We remain happy where our balance sheet currently stands as we manage our way through a period of strong revenue growth and are positioned to take advantage of a broader nonresidential recovery as well as to continue to fund our dividend and share repurchase programs. With my slides concluded, I would like to return the presentation to Tony. Tony? Thanks, Mark. And I'm going to try real hard not to be redundant. We've on that. Look, go to page 11, and I'm going to talk about backlog by market sector. What you see on the page is 2015 quarter 3 is the high watermark on this page. In fact, you would have to go back into 2008 about halfway through the year to get to a similar period at almost $3,800,000,000 of backlog. At that point, and you can see it on this page, Hospitality was a big part of our backlog at almost $500,000,000 and most of that work was in Las Vegas. Today, that's equivalent backlog is $60,000,000. So what you see over this long period of time is the diversity of Empire and our ability with our different subsidiaries to move between markets. And take advantage of good markets when they're there. Now 2015 is a growth market for nonresidential construction. And an 8.5% revenue growth for the quarter. It's a growth market for EMCOR with 8.3% of that and solid growth in both of our construction It's a growth market for EMCOR also. Most of the indicators say that it's a growth market, and we would agree with that. And we think it's going to be a growth market going into 2016. Now let's be fair. I've been critical of the growth trajectory of this nonresidential recovery. And quite frankly, a lot of addictors have been ahead of what the market has. But on balance, it is growing now. And reality is we've been more right than wrong about the trajectory of this nonresidential We think it is strengthening right now as it goes 60% of the market. And it's basically most of the commercial or all the commercial, most of the institutional, most of the hospital in the health care. When you take that building section, you put it all together as a market. It's about 60% of the non res market. So to put in perspective, this recovery, it will take it at its current momentum. And that's with better momentum in 2015 and continue to momentum in the 2016. It'll be somewhere in the middle of 2017. Likely till it gets back to 2008 levels. 1 could talk about it being the lost decade of nonresidential. It took 9 years to get back to where we were. In 2008. Commercial continues to be our largest sector at 30%. It's Donah will that we still can see good prospects there. We've earned some backlog there. This is good work, and it continues to be good work. You go to industrial, is really industrial and manufacturing. We've won some nice work there. We just want a nice milk processing plant that we will do on design build basis is one of the few things we do design build and we'll execute that project over the next 18 months to 24 months. And then we announced, right after the end of the second quarter, a large wastewater job, we won the City of West Palm Beach. And we think we have really good opportunities down in that Florida area, water projects over the next 2 or 3 years. This work will roll out over 3 or 4 years. Bidding remains strong. Continue to see a strong bidding market. I wouldn't say it's up substantially from where it was 6 months ago, but it's good. And you can see that despite the strong revenue growth, that we had backlog growth, The next question you'd ask me is where are margins? Well, they're certainly better than they were at the trough, but they certainly haven't recovered, where they were pre-two thousand and eight levels. It's not only margins that haven't recovered at that point, but contractual terms haven't either, but that's okay. We've learned how to work through that. But you can see it on our balance sheet with the net billings in excess of cost. I mean, it's just not as favorable to get ahead of it. 2015 will be a growth year non res. Like I said, as well as 2016. So look, let's be clear. We got to execute and we will continue to execute very well. Now when you go to page 12, which is really our backlog by segment, really the only news on this page is what's going on in our Industrial segment. And let me remind everybody what is in there. None of the T and M work. So you saw no backlog growth, but you saw 40% revenue growth in the quarter. That shows that Almost everything we do in our industrial segment happens outside of backlog. What is in backlog is the new build heat exchangers. And that market's down. And that market down for a very simple reason. The large integrated oil companies aren't spending as much on capital. And as capital goes down, that market goes down, as that market goes down pricing gets more difficult, we become more careful. And that's not only that market comes down here in the U. S, do a little bit of work We've spanned the non res markets. We're a big player in downstream refinery and maintenance and capital, and you can see what's going on there. But we do have expansion in our backlog in a growing nonresidential market with a little bit of retraction or quite a bit of retraction in our Industrial segment with new heat exchanger bills as the large integrated oil companies sort out their capital needs. I think now we're going to go to page 1314 and going to talk really, I guess, I lead with page 14 and go back to 13, right? And I'm going to talk about what we see for the rest of the year. Look, we're going to bring that revenue guidance to $6,600,000,000 to $6,700,000,000. So we expect pretty healthy organic growth for the year. 1st quarter, not so good. 2nd quarter catch up. 3rd quarter was really a good indication of strong organic growth. We're going to narrow our guidance range to $2.65 to $2.75 a share. We have an interesting dichotomy in our business right now. With Mark and I both talked about it. We have a strengthening nonresidential market. You can see that in our growth in our construction segments. You can see that really in our mechanical business and building services. Balance to gas to more challenging oil and gas sector really focused on our shop at this point. Because we're having record performance in Revcon Strickland. And outside of the STACK, we would strike. We would have a very good performance in our Olmstead Field business. You have refiners today with pretty good crack spreads in historically high utilization, but they are stretching out some maintenance because they're making very good money right now. And if they are integrated producers, they are cutting back capital. We are coming off 2 very strong quarters in our Industrial segment, driven by in a they're abnormally strong. I think we think that third quarter was abnormally strong because of some of the work we're doing on the capital side with our field operations. And we have growing backlog in our construction business with a good mix of work. We like our backlog mix right now. Our Building Services business had steady improvement over a headwind from those government JVs that quite frankly, we've talked at ad nauseam and we'll pretty much be done with that as we get exit this year. We have 2 more we have more right going on than not at Empor right now. But those of you that know us, we're still striking a cautious tone. And a lot of people say, why is that? Why are you cautious at this point? I think it's the headwind we're experiencing from the oil oil and gas integrated producers on the capital side. We've had a 25% drop in that backlog. Now just to size that for you, it's about 10% to 13% of our Industrial segment revenues. And really that has affected operating margins through the year. So one of the questions would be why have better drops. When we had good drops, we had 8.3% organic growth and about 13% operating profit growth in the quarter. We would have liked to see more and we would like to see some margin expansion with that. But with our mix of work and the loss of some of the shop work and mix of more capital work on our field operations and industrial, it makes it harder to get that drop through on the margins. When you look at our revised range, it's really about $10,000,000 operating income to get to that $2.65 to $2.75. So what I'd like to do now is focus on how you go from the bottom end of that range to the top end of the range. We really have two levers that we can pull, I think, at this point. 1 is better organic revenue growth. Can we get the projects done a little faster the ones we have in backlog that we're planning on at this point at the low end of the range. And Q3 we've had pretty good strong organic growth and our guys are executing really well right now. And the nonresidential market continues to improve because we had backlog growth despite that strong organic growth. So the construction revenues coming a little stronger than we expect, maybe they could. And if they do, we go towards more towards the middle to the top end of the range. Look, before you ask the question, we are in a decent fall turnaround season, here at EMCOR in our Industrial Services business. We do expect a good mix of repair work for our shops, but again, we're struggling with the new OEM heat exchanger build. Expect to be busy with as we do that. However, we are not really driven by some of the specialty services we provide, coupled with really strong shop performance. And we've had toward growth of over 20% the last five quarters in our Industrial segment, so we throw a little caution on that and say, could 4th quarter be as good as what 4th quarter was last year? And at the low end of the range, it's not at the top end of the range, it would be at least that good. And of course, a little snow in December would help our result So now you get to the balance sheet and say how you're going to deploy the balance sheet. You guys have generated cash despite the organic growth or strong organic growth. You always generate cash. So what are you going to do? We talked in our second quarter call about that we thought the business development activity was a little busier. And it is, but quite frankly, We've looked at a couple of substantial deals this year. We walked away from a several of them because of a weakening outlook and we just couldn't get agreement what that outlook looked like. We're pretty sure we were right, or we were simply outbid, and we're going to maintain our discipline. We're known for that. And if we're going to pay up for something that's significant, we better be able to see the synergies play we saw with Revcon Strickland, and you can see that today in the performance of that asset this year. It's having a terrific year. Now We did close a nice fire protection deal and we'll see deals like that where they fit right into our operations. We know exactly how that, how we're going to get the synergies and it adds to either our geographic or some type of service we can offer either on the construction building services or industrial side. Was it significant? What would be significant to that part of our portfolio in the sense that we'll be able to do more work? Is it significant to MCO overall? Not as much as we'd like it to be on a year to date basis as far as the deals we've done. So you got the strength in cash flow. You expect to continue to have strength in cash flow. You have a very liquid balance sheet. So our board has authorized us to go purchase an additional $200,000,000 in shares and we have about $140 left on the remaining authorization. And we're certainly not going to be specific about how that will roll out over the next 12 to 18 months. Our business is running well and we continue to expect cash flow at or equal to net income. We had a good quarter like Mark said, on a year to date basis, we've set records on a number of basis through the 9 month period. Our company is performing well. We've got a little bit win in the oil and gas sector for some of the capital work we do. And with that, I'll take questions. Your first question comes from the line of Adam Steinheimer of BB And T Capital Markets. Tony, on the industrial side, do you think the revenues will be down there in 2016? I'm just trying to figure out exactly what you're trying to tell us. In 2016, in 2016, yes? I don't know yet. We'll have to balance is, here's what we know today. We know that we have a decent fall turnaround season for the fourth quarter, probably not as strong as it was last year. Now could it turn out stronger? If 400 men get deployed for another 3 weeks, we'll have a pretty good 4th quarter. We won't know that until the end of fourth quarter. The first quarter turnaround season looks okay. It looks pretty good. We have a nice schedule of work lined up. Certainly not expecting another strike this first quarter. So we expect to have a pretty good first quarter. What we don't know, what the back half of the year looks like, I mean, clearly we're scheduled to do a lot of work. That can change. And we usually bring that into a more crystal view going to your internal question is, we expect our that 10% to 13% of revenues in that shop business to be down. We'll be able to overwhelm that with better work out of some of our specialty lines of services. And will our Industrial Services business, that lost work because of the shop on a year over year basis to be able to replace some of that gap and then offset some of the capital work that we had done this year that was abnormally large. So put it all together, we would know. But I guess if I'm sitting here today, we don't give guidance on 2016. I can't imagine we could grow to the kind of levels we have over the past 5 quarters. Got it. Okay. And then on the mechanical side, it looked like you had a couple projects that brought down margins maybe a touch in the quarter. Are those done now or is there maybe a lingering effect there? Part of it is, and I'll mark it into it a little more. Part of it is, we've learned when we're working in the space to have a fairly negative view of how long it will take to, negotiate things. And so we tend to be fairly conservative because of that. And Mark, I'll let you take it from there. Adam, in particular, the largest project is scheduled to be completed in early 2016. The reason why a write down was necessary this quarter is that the completion date was extended, not due to our work, but because of the work of others on the job. And at this point, we haven't received a change order for extended overheads. So we had to recognize the cost of the extended overheads, without any recovery. Obviously, we will continue to negotiate to try to get recovery. But unfortunately, at this point, we're not in a position to, to offset it. Yes. And I think in general, when we've been working with government entities on larger projects, that's been our mode because it's so difficult. We usually get there we get there over a long period of time on a change order. REA is a different discussion, it's even more difficult. And that's been pretty much true really since about 2011, when the sequester really started to come in, it's gotten much more difficult, to get money that you're entitled to. And so we take a conservative view was it's becoming unknown. Okay. And sorry if I missed that, but how how much was that write down? It wasn't significant enough to disclose discretely. But it's, if we had recovery, if we had recovery, it may warrant some level of disclosure beyond what we provided to date. Okay. Thanks guys. It's not a big execution issue here. It's a timing issue with respect to like Mark said, something slipped to the right that had nothing to do with us. Your next question comes from the line of Alex Rygiel of FBR Capital Markets. Hey, Toni, can you, sorry, maybe you did and I just happened to miss it, but on one of the last slides you talked about how you expect positive backlog growth in fourth quarter in 2016. Can you go into a little bit more detail sort of in the end markets that you think are going to be some of the bigger catalyst? Sure. I think, industrial, non So industrial as a market sector, not industrial as a segment, will have growth. I think water and waste to water could have growth, whether it happens in Q4, Q1. I do expect commercial to have some growth And potentially we may see some signs of life in health care. And when you look at that sort of end market mix To me, it looks like a favorable mix shift towards better margin business. So especially healthcare, water, wastewater, industrial as well, generally speaking, but am I coming to the right conclusion on that? Yes. I think in general, Alex, if you look at margins and mix overall, we've gravitated towards a better mix. The only caution that we have is part of what see as we do large work is the large work, as you know, we are appropriately conservative through the first part of that work until we really size up our estimate versus what conditions we're seeing. So some of the larger work may come with dampened margins as we roll into it. But in general, if you complete the jobs, we are moving towards a more favorable mix. So we got a more favorable mix, but we might have somewhat of a short term negative mix associated with project size. Yes. Okay. Very helpful. And then just to reconfirm on the buyback program, the previous $140,000,000 that remains is addition to the $200,000,000 that's new correct. So total authorization outstanding right now is $3.40. You got it. Your next question comes from the line of John Rogers of D. A. Davidson. If we could just go back for a second to the Q4 implied guidance here, the the midpoint of the revenue range would suggest overall revenue, really no revenue growth. Is that all industrial services I guess, Tony, from your comments, production markets getting better. Yes. 2 things, John, would be industrial services. And it would be still headwind from government JVs. You're not getting to see the underlying growth that we have in building services because the year over year impact of those JVs. Okay. And then and as it relates to backlog, especially on the construction side of the business, Are margins getting better there? Yes. A little bit. Okay. And is that pricing or just better you both. Okay. And then, Tony, I know you won't give us specifics, but that's okay. But could you run through kind of your priorities for acquisitions, end markets, regions, whatever? Yes. John, I think, we would always buy a well performing electric mechanical or industrial contractor to augment our construction operations. If it's either a good tuck in like the one we just did on the fire protection side that opens up geography to us or customers to us. Or gives us a little more service and fire protection. That's just an example. We would do that. Or if it establishes us in a new job fee or a new product line within a geography, we would do that. Likewise in building services, I think the thing we would be most interested in the building services space would be the expansion of our mechanical services footprint. We continue to have some white space on the board and we would be happy to fill that in. Or within a market, sometimes we can expand our services. Sometimes we do these tiny asset purchases to bring a controls line with it. And all of a sudden, we create a $3,000,000,000 or $4,000,000 or $5,000,000 business out of nothing. That's more of a micro tuck in, I would call it. But likewise, we would also look for plant services type where we can service manufacturing plants from an O and M MRO basis. We would look at that also in building services. I don't think we based business. That's best done organically. Now if someone had a unique capability that we could add to our services, a little another small line of service, But I wouldn't think in either case, it would be in place for major acquisition. And then as you go to industrial, we've digested Repcon Strickland very well. We would acquire there. Now there, we're looking for specialty services. Or we're looking for shop footprint, either or, like we did with Redmond. And then you think about things we could do outside of that, I think anything that has a technician based service to it, where we could add to. We would do that. But we're pretty happy with the segments we're in. We think we have acquisition growth within them. Sometimes it just don't work out and we get paid to do the right acquisitions and be disciplined when we're doing them. And we'll continue to do that. Okay. And the ones that you missed on this past year that you weren't able to come to terms on. Were any of those large acquisitions? All three of them would have been significant. They all would have had, they were in the 100 of 1,000,000 of revenue wise and they were in the 100 of 1,000,000 of dollars purchase price. Your next question comes from the line of Tahira Afzal with KeyBanc Capital Market. Good morning, Tee. So, I guess first question is, Tony in the past, you said that if you can grow revenue let's say in the mid single digit, you should be able to get some leverage on the margin line I guess I'd love to get your thoughts in terms of how mix plays a role in that. If industrial is getting a little more difficult to call on the visibility side. But obviously your non res business outside of is doing well. Do you still get leverage on the margin side or do you need to update, how you think about that? Well, I think we're getting some leverage on the you've got leverage. Now did we get the margin expansion we would have liked to have gotten? The mix overwhelmed at this quarter and money Mark can go into more detail. But when we lose just big numbers, when we lose, shop, good shop work, it takes quite a bit of the other to make up for it. Mark? Yes. And I think, T, the phenomenon that we experienced in this quarter, in particular, with industrial and to a lesser extent, with Building Services is those revenues and associated operating margins that we were the beneficiary of in the quarter last year that did not replicate in the current period, were double digit margin revenues. And, albeit from a volume perspective, not that significant, but when you're getting that level of conversion, it clearly does have an impact on the overall margins on a segment basis as well as the consolidated company, just because of the overall margin profile, Amcor? Look, Pete, it's It's safe to say if we're replacing something that's, and Mark just said twice the margin profile of EMCOR at least, was something that's even it's still better than the margin profile of EMCOR that may have marked 400 or 500 basis points difference. It's hard for us to grow and expand margins. So we didn't expect to see this kind of mix shift to this rapidly, within a quarter clearly, it took some margin performance away from us. But again, we're happy with the margin dollar growth. Right. And I didn't want to I mean, improvements you made on G And A, the restructuring you've done is very commendable. So I did want to convey that. And I guess my what I'm trying to ask is, as you look at the revenues on the non res side, pushing through and now showing visibly. Will we still struggle to get out of the low 4% sort of below 4.5 percent operating margin range as you look forward? I don't think we'll struggle. I don't think third quarter, 4 point, was percent is the high watermark for EMCOR by any stretch of the imagination. I think if we get more construction revenues, we will continue to get better drop through in our mechanical and electrical segments. I think building services won't be a drag Much of a drag, it'll be sort of low 4s, mid 4s. I think corporates will sort of stay fairly level. And I think the headwind we have, T, and why I'm being a little cautious is, the shop work is really good work. And if we can get enough repair work to overwhelm that, then we'll get back on par. But if we can't get enough repair work to start filling in the gaps around that OEM work, we're taking and we take out the cost, which we will do. We're pretty good at that. We'll have some headwinds. Right. And the only other thing I would add to you know, and if you go back to when we were acquired RSrefcon Strickland, we were pretty clear that their margin pro file relative to our legacy industrial business was lower. And the other phenomena we have that the majority of the revenue growth that we're experiencing in that segment is coming from the rep constrictment portion of the business. So once again, higher margin profile than most of the other EMCOR businesses, but a lower slightly lower margin profile than the other businesses within the Industrial segment. So happy with the performance. They're executing very, very well. It's just it's the law of averages and simple math. Yes. And look, I got nowhere with the question. And it's a good question. It's one that we've been wrestling with quite frankly internally. If the mix stayed favorable in industrial, and we had strengthening non res, we would expect to be touching the high fours and trying to make our way to 5. If we have this headwind in industrial in the shops, it's going to damp us down to the mid-4s with really good execution in our construction business. Great. That was actually pretty helpful, Tony and Mark. Thanks a lot. Okay. I think that's it for questions. Look, we had a good quarter, year to date, and Mark went through some of the records we're at. I'll leave you with 3 things. But one, as we go to the end of the year, our business is in really good shape. 2, we have confidence in that business and it really shows by what our board authorized us to do with our meeting yesterday, go buy the best company you have, which is you if we can't make the right deals. And that's this management Ted is dedicated to is building value for our shareholders. And number 3, we've got really terrific, folks in the field executing very well right now. The headwind we have, we will get through. We'll fight through that. We've got a great team down there in Beaumont and we'll do that. And, we wish you all a great Thanksgiving. And as you move into the holidays, have a great holiday. And I guess we won't we'll see some of you out on the road, but for the most part, I guess we'll talk to you all in February, and, we'll look to finish the year strong. Thank you all very much. This concludes today's call. You may now disconnect.