Earnings Call: Q3 2015

Oct 29, 2015

My name is Janisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group third quarter 2015 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. Thank you, Ms. Michelle Bitman with FTI Consulting, you may begin. Thank you, Janisha, and good morning, everyone. Welcome to the EMCOR 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 Matz, 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 slide two. Slide two depicts the folks that are with me today to discuss the quarter and nine months 2015 results. They are Tony Guzzi, our President and Chief Executive Officer, Mark Pompa, Executive Vice President and Chief Financial Officer, Maeve Heffler, Vice President, Marketing and Communications, and our Executive Vice President and General Counsel, Sheldon Kamen. 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's management perception as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for 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 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 turn the call over to Tony. Tony? Thanks, Kevin. I'm going to be on pages two through five 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 forma 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 $1.7 billion with underlying organic growth of 8.3%. 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 growth. All segments had organic revenue growth in the quarter. We had operating margins of 4.1%, compared to 3.9% in the year-ago period. Operating income grew 13.1%. Operating cash flow from continuing operations were strong in Q3 at $100 million versus $69 million in the year-ago period, and that is in the face of very strong organic growth. Great cash flow performance. I'm now going to cover some segment highlights. Our Construction segment revenues grew organically at 5.7% when you put the two 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 continued to see growth as its 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. As we have said 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 non-residential recovery. At 5.6% operating margins on a combined basis, our Construction businesses continue their strong performance through the year. We have a good mix of work in our backlog and continue to expect to execute well on our projects for our customers. Building Services had a decent quarter but had a tough set of comps, and third quarter and fourth quarter last year were strong in our government business as we wrapped up the two large site-based contracts we lost on rebid early in 2014. 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. We had steady and improved performance in our commercial site-based business. We expect building services to earn in excess of 4.2% operating margins for the year. Our industrial business has had a very strong quarter, with 40% organic revenue growth and operating profit that nearly doubled. This performance is driven by our field organization, most specifically our RepconStrickland team, who are on track to have a record year. Our Ohmstede Field businesses had a more typical Q3, and it bore 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, the ones built for new applications or major retrofits, remain under pressure from both 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 we have discussed many times is really just the new build heat exchangers. It has dropped from $97 million in the year-ago period to $72 million 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 U.K. business, we continue to see strength now that the significant restructuring is largely behind us. We had nice organic revenue growth of 11.7%, despite foreign exchange headwinds. We grew operating profits at almost 9% and lost at least that in FX impact and converted in the range at 3.5% 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 $3.8 billion, we are at our highest level of backlog since mid-2008. We like the mix of our backlog at building services, U.K., 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 cash flow of our business. As a result of that, our board has authorized us to repurchase an additional $200 million of our shares. 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 six. As Tony just indicated in his opening commentary, I will provide a detailed discussion of our third quarter 2015 results before moving to year-to-date key financial data derived from our consolidated financial statements, included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. Let's get started with our third quarter performance. Obviously, some of this will be redundant to what Tony just said, and I want to make sure we wrap a bow around it so everybody knows what happened. Consolidated revenues of $1.70 billion in quarter three are up $132.4 million or 8.5%. All reportable segments are reporting increased revenues quarter-over-quarter. Our third quarter revenues include $1.7 million 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%. U.S. Electrical Construction revenues increased 9.4% to $344.4 million. Consistent with the revenue performance in the second quarter, this segment's growth is due to greater project activity within the commercial healthcare and transportation market sectors, as well as an increase in manufacturing market sector project activity. This strong quarterly revenue growth led to a slight decline in this segment's backlog at September 30, 2015, when compared to their backlog as of December 31st of last year. U.S. Mechanical Construction third quarter revenues increased $22.3 million or 3.9%. 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 million or approximately 5.9%. U.S. Building Services revenues of $428.3 million increased a modest $700,000 or 0.2%. This is despite the headwinds associated with the loss of two 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 second 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 million 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 $69.5 million or 40.3% due to capital and maintenance project activity from our industrial field services operations, inclusive of turnaround activities. United Kingdom Building Services revenues of GBP 97 million increased GBP 10.2 million or 11.7%, despite the headwind of a weakening British pound, resulting in a quarter-over-quarter unfavorable exchange rate impact of GBP 7.6 million. Consistent with their second quarter trend, 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 seven. Selling General and Administrative Expenses of $165.1 million represent 9.7% of revenues and an increase of $5.1 million from quarter three 2014. 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&A as a percentage of revenue of any quarter in 2015. Our third quarter is inclusive of $300,000 of incremental expenses related to an acquisition, resulting in an organic increase of $4.8 million, and is due to higher employee-related costs, primarily consisting of salaries and incentive compensation, as well as increased costs pertaining to our medical insurance programs. Operating income of $70 million represents 4.1% of revenues and compares to $73.6 million and 4.7% of revenues in 2014's third quarter. Please note that last year's third quarter is inclusive of $11.7 million 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 income increased $4.9 million to $25.5 million, with a corresponding 80 basis point improvement in 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 $26.9 million represents a $3.3 million decrease from last year's quarter. Reported quarterly operating margin is 4.6%, which is 70 basis points below 2014's third quarter. Despite the strong revenue growth generated by the 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 to continue to improve their performance as they have on a year-to-date basis through September 30th. Our total U.S. construction business is reporting an improvement of $1.6 million, 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 $3.4 million to $16 million, or 3.7% 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 two government contracts completed in 2014 that were not renewed pursuant to rebid. As we approached the completion of this contract work in 2014, 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 $2.4 million was additive to a marginal decrease in operating income of this segment's Mobile Mechanical Services division due to an unfavorable change in revenue mix between projects and service. Our Industrial Services segment is reporting $14.3 million of operating income, or 5.9% of revenues. The third quarter increase is due to increased revenue levels and corresponding operating income from our field services operations due to higher turnaround activities as well as large capital and maintenance project activity that continued from the second 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. U.K. Building Services operating income of $3.4 million represents 3.5% of revenues, which is an increase of approximately $300,000 and is essentially flat from an operating margin comparison to the corresponding 2014 quarter. Lastly on this slide, cash provided by operations is $101.6 million for the third quarter and is $95.6 million through the first nine months of the year. We continue to see favorable cash conversion despite the increased levels of working capital required to fund our organic revenue growth. We are now on slide eight. Additional key financial data on this slide not addressed during my highlights summary are as follows. Quarter three gross profit of $235.4 million represents 13.9% of revenues, which has improved from the comparable 2014 period by $13.2 million. The quarter-over-quarter reduction in gross margin was driven by reduced mechanical construction 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 2014's third quarter. Diluted earnings per common share from continuing operations is $0.66 as compared to $0.68 for the quarters ending September 30, 2015 and 2014, respectively. On an adjusted basis, reflecting the removal of the gain on sale of building in 2014's third quarter, diluted earnings per common share from continuing operations would have been $0.57 per share for 2014 as 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 for third quarter in regards to both consolidated revenues as well as gross profit. Please turn to slide nine. With the quarter out of the way, I would like to discuss the results for the nine-month period ending September 30, 2015. Revenues of $4.94 billion are up $230.7 million as compared to $4.71 billion 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 $691.9 million is greater than the representative 2014 period by $33.2 million and is consistent on a gross margin basis at 14%. Selling, General and Administrative expenses of $488.1 million represent 9.9% of revenues, compared to $454.2 million or 9.6% of revenues in 2014. On a sequential basis, our SG&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%. 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, it has resulted in an increase in our overall SGA as a percentage of revenues. Restructuring activity is relatively flat between the two nine-month periods. Year-to-date operating income is $203 million or 4.1% of revenues and represents a $12.4 million decrease over 2014's year-to-date performance. 2014's year-to-date operating income performance is inclusive of the $11.7 million gain on sale of building, cited numerous times during this call and previous calls. On an adjusted basis, removing the gain on sale of building from 2014's results, the year-over-year variance is approximately $600,000 unfavorable as we have essentially closed the operating income gap on a pro forma basis that was generated in the first quarter of this year 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 2015. All segments are reporting higher operating income year-over-year except for UK Building Services, which in 2014 benefited from $4.8 million of income associated with the 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 nine-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 2015's $1.92 per share, representing a 5.5% increase year-over-year. Lastly, on this slide, as I had previously benchmarked with our third quarter performance, I would like to point out that the results of operations for 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 first nine 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 reduce and is 17.5% as of September 30th. Our cash balance is up slightly from year-end as we have used less cash in financing activities during 2015 than during the comparable 2014 period. Working capital levels have increased since 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 in identifiable and tangible asset balances reflect the minor impact of the acquisition made during the second quarter, as well as $28.4 million of year-to-date intangible amortization expense. Total debt is approximately $322 million, with the change from December 31st, 2014, primarily attributable to mandatory quarterly debt repayments under our term loan. The change in our stockholders' equity balance for the first nine months is not equivalent to our net income 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 non-residential 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. I'm going to try real hard not to be redundant. We've been working on that. Go to page 11, I'm going to talk about backlog by market sector. What you see on the page is 2015 quarter three 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 $3.8 billion of backlog. At that point, and you can see it on this page, hospitality was a big part of our backlog at almost a half a billion, and most of that work was in Las Vegas. Today, that equivalent backlog is $60 million. What you see over this long period of time is the diversity of EMCOR and our ability with our different subsidiaries to move between markets and take advantage of good markets when they're there. 2015 is a growth market for non-residential construction, at 8.5% revenue growth for the quarter, it's a growth market for EMCOR, with 8.3% of that in solid growth. In both of our construction segments, it's a growth market for EMCOR also. Most of the indicators say that it's a growth market, we would agree with that, we think it's going to be a growth market going into 2016. Let's be fair. I've been critical of the growth trajectory of this non-residential recovery, quite frankly, a lot of the predictors have been ahead of what the market has. On balance, it is growing now, the reality is we've been more right than wrong about the trajectory of this non-residential recovery. We think it is strengthening right now as it goes into 2016. When you look at the building section, which is about 60% of the market, and it's basically most of the commercial or all the commercial, most of the institutional, most of the hospitality, and the healthcare. When you take that building section, you put it all together as a market, it's about 60% of the non-res market. To put in perspective this recovery, it will take it at its current momentum, that's with better momentum in 2015 and continuing momentum into 2016. It'll be somewhere in the middle of 2017, likely, till it gets back to 2008 levels. One could talk about it being the lost decade of non-residential. It took nine years to get back to where we were in 2008. Commercial continues to be our largest sector at 30%. It's down a little bit, but we still could see good prospects there. We burned some backlog there. This is good work, and it continues to be good work. You go to industrial, which is really industrial and manufacturing. We've won some nice work there. We just won a nice milk processing plant, that we will do on a design-build basis. It's one of the few things we do design-build, and we'll execute that project over the next 18-24 months. We announced, right after the end of the second quarter, a large wastewater job we won with the City of West Palm Beach, and we think we have really good opportunities down in that South Florida area on water projects over the next two or three years. This work will roll out over three or four years. Bidding remains strong. We continue to see a strong bidding market. I wouldn't say it's up substantially from where it was six 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-2008 levels. It's not only margins that haven't recovered to that point, but contractual terms haven't either. That's okay. We've learned how to work through that. You can see it on our balance sheet with the net billings in excess of costs. It's just not as favorable to get ahead of it. 2015 will be a growth year in non-res, like I said, as will 2016. 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. Let me remind everybody what is in there. None of the T&M work. 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. That market's down for a very simple reason. The large integrated oil companies aren't spending as much on capital. As capital goes down, that market goes down. As that market goes down, pricing gets more difficult, we become more careful. That's not only that market comes down here in the U.S., we do a little bit of work in Latin America too, and that market's down substantially too with the lower price of crude. Reality, we're a big company. We span the non-res markets. We're a big player in downstream refinery maintenance and capital, and you can see what's going on there. We do have expansion in our backlog in a growing non-residential market, with a little bit of retraction or quite a bit of retraction in our industrial segment with new heat exchanger builds as the large integrated oil companies sort out their capital needs. I think now we're going to go to page 13 and 14. I'm going to talk. I guess I lead with page 14 and go back to 13, right? I'm going to talk about what we see for the rest of the year. We're gonna bring that revenue guidance to $6.6 billion-$6.7 billion. We expect pretty healthy organic growth for the year. First quarter, not so good. Second quarter, catch up. Third quarter was really a good indication of strong organic growth. We're going to narrow our guidance range of $2.65-$2.75 a share. We have an interesting dichotomy in our business right now. Mark and I both talked about it. We have a strengthening non-residential market, and you can see that in our growth in our construction segments. You can see that really in our mechanical services business and building services, balanced against a more challenging oil and gas sector, really focused on our shop at this point because we're having record performance in RepconStrickland. Outside of the strike, we would have had a very good performance in our Ohmstede Field business. You have refiners today with pretty good crack spreads and historically high utilization. They are stretching out some maintenance because they're making very good money right now. If they are integrated producers, they are cutting back capital. We are coming off two very strong quarters in our industrial segment. In one way, they're abnormally strong. 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. 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 has had steady improvement over a number of years and throughout this year, and really had to overcome that 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 exit this year. We have more right going on than not at EMCOR right now. Those of you that know us, we're still striking a cautious tone. A lot of people say, "Why is that? Why are you cautious at this point?" I think it's the headwind we're experienced from the 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%-13% of our industrial segment revenues. Really, that has affected operating margins through the year. One of the questions would be, why didn't you have better drop-through? We had good drop-through. 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 have liked to have seen some margin expansion with that. With our mix of work and the loss of some of the shop work and the mix of more capital work on our field operations in 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 million of operating income to get to that $265 million-$275 million. 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. One is better organic revenue growth. Can we get the projects done a little faster, the ones we have in backlog, than we're planning on at this point, at the low end of the range? Q3 would tell you we've had pretty good strong organic growth, and our guys are executing really well right now. The non-residential market continues to improve because we had backlog growth despite that strong organic growth. Could construction revenues come in a little stronger than we expect? Maybe they could. If they do, we go 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 U.S. 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. We expect to be busy with our field operations. We have lots of folks out in the field doing a lot of great work. We will have some scope increases as we do that. However, we are not sure that it's going to be as strong as it was last year. Last year was an exceptional fourth quarter in our industrial business, really driven by some of the specialty services we provide, coupled with really strong shop performance. We've had torrid growth of over 20% the last five quarters in our industrial segment. We throw a little caution on that and say, could fourth quarter be as good as what fourth quarter was last year? At the low end of the range, it's not. At the top end of the range, it would be at least that good. Of course, a little snow in December would help our results. Now you get to the balance sheet and you say, how are you going to deploy the balance sheet? You guys have generated cash despite the organic growth, the strong organic growth. You always generate cash. 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. Quite frankly, we've looked at a couple substantial deals this year. We walked away from several of them because of a weakening outlook, and we just couldn't get agreement on what that outlook looked like. We're pretty sure we were right, or we were simply outbid. We're going to maintain our discipline. We're known for that. If we're going to pay up for something that's significant, we better be able to see the synergies like we saw with RepconStrickland, 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 we're going to get the synergies. 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? Well, it'd be significant to that part of our portfolio in the sense that we'll be able to do more work. Is it significant to EMCOR 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. You got the strength in cash flow. You expect to continue to have strength in cash flow. You have a very liquid balance sheet. Our board has authorized us to go purchase an additional $200 million in shares, and we have about $140 left on the remaining authorization. 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. We continue to expect cash flow at or equal to net income. We had a good quarter, and like Mark said, on a year-to-date basis, we've set records on a number of paces through the nine-month period. Our company's performing well. We got a little bit of headwind in the oil and gas sector for some of the capital work we do. With that, I'll take questions. At this time, I would like to remind everyone, in order to ask a question, please press star and the number 1. Again, press star and the number 1. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Adam Thalhimer of BB&T Capital Markets. Hey, good morning, guys. Nice quarter. Thank you. 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. Don't know yet, Adam. What 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. Could it turn out stronger? If 400 men get deployed for another three weeks, we'll have a pretty good fourth quarter. We won't know that until the end of the fourth quarter. The first quarter turnaround season looks okay. It looks pretty good. We have a nice schedule of work lined up. We're 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. We're scheduled to do a lot of work. That can change, and we usually bring that into a more crystal view going near. The real question is, we expect that 10%-13% of revenues in that shop business to be down. Will we be able to overwhelm that with better work out of some of our specialty lines of services? Will our industrial services business that lost work because of the shop on a year-over-year basis 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. Put it all together, we wouldn't know. 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 five quarters. Got it. Okay. 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? Well, part of it is, and I'll let Mark get into it a little more. Part of it is, we've learned when we're working in the government space to have a fairly negative view of how long it will take to negotiate things. We tend to be fairly conservative because of that lens. 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 work of others on the job. At this point, we haven't received a change order for extended overhead. We had to recognize the cost of the extended overheads without any recovery. Obviously, we will continue to negotiate to try to get recovery. Unfortunately, at this point, we're not in a position to offset it. Yeah, 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, but we get there over a long period of time on a change order. REA is a different discussion. It's even more difficult. 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. We take a conservative view because it's become an unknown. Okay. Sorry if I missed that, how- Pardon me? How much was that write-down? It wasn't significant enough to disclose discretely. Okay. If we had recovery, it may warrant some level of disclosure beyond what we've 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. Got it. Your next question comes from the line of Alex Rygiel of FBR Capital Markets. Thank you. Good morning, guys. Morning, Alex. Morning, Alex. Hey, Tony, sorry, maybe you did, and I just happened to miss it, on one of the last slides, you talked about how you expect positive backlog growth in the 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 catalysts? Sure. I think industrial, as a market sector, not industrial as a segment, will have growth. I think water and wastewater could have growth, whether it happens in Q4 or Q1. I do expect commercial to have some growth. Potentially we may see some signs of life in healthcare. When you look at that sort of end market mix, to me it looks like a favorable mix shift towards better margin business, especially healthcare, water, wastewater, industrial as well, generally speaking. Am I coming to the right conclusion on that? Yeah. 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, and as part of what you 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. Some of the larger work may come with dampened margins as we roll into it. In general, if you complete the jobs, we are moving towards a more favorable mix. 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. Then just to reconfirm on the buyback program, the previous $140 that remains is in addition to the $200 that's new, correct? Yes authorization outstanding right now is 340? You got it. Great. Thank you. Nice quarter. Thank you. Your next question comes from the line of John Rogers of D.A. Davidson. Morning, John. Hi. Good morning. If we could just go back for a second to the Q4 implied guidance here. The midpoint of the revenue range would suggest overall revenue, really no revenue growth. Is that all industrial services? Because. Yes I guess, Tony, from your comments. Two things Construction market's getting better. Yeah. Two things, John. It'd be Industrial Services. It would be still headwind from the 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. As it relates to backlog, especially on the construction side of the business, are margins getting better there? Yes. A little bit. Okay. Is that pricing or just better utilization? Both. Okay. Tony, I know you won't give us specifics, but that's okay. Could you run through kind of your priorities for acquisitions in markets, regions, whatever? Yeah. John, I think we would always buy a well-performing electrical or 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 in fire protection. That's just an example. We would do that. Or if it establishes us in a new geography 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 that bring a controls line with it. All of a sudden, we create a $3, $4, or $5 million business out of nothing. That's more of a micro tuck-in, I would call it. Likewise, we would also look for plant services type, where we can service manufacturing plants from a O&M, MRO basis. We would look at that also in building services. I don't think we would be looking to aggressively grow through acquisition at this point, either our government business or our site-based business. That's best done organically. Now, if someone had a unique capability that we could add to our services, another small line of service, but I wouldn't think in either case it would be a place for a major acquisition. As you go to industrial, we've digested RepconStrickland 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. 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. We're pretty happy with the segments we're in. We think we have acquisition growth within them. Sometimes they just don't work out. We get paid to do the right acquisitions and be disciplined when we're doing them. We'll continue to do that. Okay. 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've been significant. They were in the hundreds of millions of dollars revenue-wise. They were in the hundreds of millions of dollars purchase price. Okay. Thanks. That's helpful. Your next question comes from the line of Tahira Afzal of KeyBanc Capital Markets. Hey, guys. Morning. Morning, T. I guess first question is, Tony, in the past, you said that if you can grow revenues, 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 go on the visibility side, but obviously your non-res business outside of that is doing well. Do you still get leverage on the margin side, or do you need to update how you think about that? I think we're getting some leverage on the drop-through side, right? If you grow revenues 8.3% organically, you grow operating profit 13.1%, you've got leverage. Did we get the margin expansion we would've liked to have got? The mix overwhelmed that this quarter, maybe Mark can go into more detail. When we lose just big numbers, when we lose good shop work, it takes quite a bit of the other revenue to make up for it. Mark? I think, T, the phenomenon that we experienced in this quarter, in particular with Industrial, and to a lesser extent within Building Services, is those revenues and associated operating margins that we were the beneficiary of in the third quarter last year that did not replicate in the current period, were double-digit-margin revenues. 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 of EMCOR. Look, T, it's safe to say if we're replacing something that's, and Mark just said twice the margin profile of EMCOR at least, with something that's still better than the margin profile of EMCOR, but may have 400 or 500 basis points difference. it's hard for us to grow and expand margins. We didn't expect to see this kind of mix shift this rapidly within a quarter, and clearly it took some margin performance away from us, but again, we're happy with the margin dollar growth. Right. The improvements you made on G&A, the restructuring you've done is very commendable, so I did want to convey that. No, absolutely. I guess what I'm trying to ask is, as you look at the revenues on the non-res side, really pushing through and now showing visibly, will we still struggle to get out of the low 4% sort of below 4.5% operating margin range as we look forward? I don't think third quarter 4.1% is the high watermark for EMCOR by any stretch of the imagination. I think if we get Got it more construction revenues, we will continue to get better drop-through in our mechanical and electrical segments. I think building services won't be much of a drag. It'll be sort of low fours, mid-fours. I think corporate will sort of stay fairly level. I think the headwind we have, T, and why I'm being a little cautious is, the shop work is really good work. If we can get enough repair work to overwhelm that, then we'll get back on par. If we can't get enough repair work to start filling in the gaps around that OEM work, and we take out the cost, which we will do, we're pretty good at that, we'll have some headwind. Right. The only other thing I would add, T, is, if you go back to when we acquired RepconStrickland, we were pretty clear that their margin profile relative to our legacy industrial business was lower. The other phenomena we have is that the majority of the revenue growth that we're experiencing in that segment is coming from the RepconStrickland portion of the business. Once again, higher margin profile than most of the other EMCOR businesses, but a slightly lower margin profile than the other businesses within the industrial segment. Happy with the performance. They're executing very well. It's the law of averages and simple math. Look, I think I know where you're going with the question, and it's a good question. It's one that we've been wrestling with, quite frankly, internally. Right. 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 five. If we have this headwind in industrial in the shops, it's going to damp us down to the mid-fours with really good execution in our construction business. Okay, great. That was actually very helpful, Tony and Mark. Thanks a lot. Okay, I think that's it for questions. Look, we had a good quarter. Year to date, Mark Pompa went through some of the records we're at. I'll leave you with three things. One, as we go to the end of the year, our business is in really good shape. Two, we have confidence in that business, and it really shows by what our board authorized us to do at their meeting yesterday. Go buy the best company you have, which is you, if we can't make the right deals. That's what this management team is dedicated to, is building value for our shareholders. Number three, 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 that will do that. We wish you all a great Thanksgiving, and as you move into the holidays, have a great holiday. I guess 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. We'll look to finish the year strong. Thank you all very much. This concludes today's call. You may now disconnect.