Greetings, and welcome to Quanta's acquisition of Stronghold conference call. At this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Kip Rupp, Vice President of Investor Relations. Please go ahead, sir.
Thank you, operator, and thank you everyone for joining us this morning to discuss Quanta's acquisition of Stronghold. Before we proceed with the call, I'd like to share a forward-looking statement disclaimer. Please remember that information reported on this call speaks only as of today, July 21, 2017, and therefore you are advised that any time sensitive information may no longer be accurate as of any replay of this call. This call will include forward-looking statements intended to qualify under the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all statements reflecting Quanta's expectations, intentions, assumptions, or beliefs about future events or performance, or that do not solely relate to historical or current facts.
Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or that are beyond Quanta's control, and actual results may differ materially from those expressed or implied. For additional information concerning some of these risks, uncertainties, and assumptions, please refer to the company's 2016 annual report on Form 10-K and its other documents filed with the Securities and Exchange Commission, which are available on Quanta's or the SEC's website. Management cautions that you should not place undue reliance on these forward-looking statements, and Quanta does not undertake any obligation to update any forward-looking statements, and disclaims any written or oral statements made by any third party regarding the subject matter of this call. Now, turning to the introduction and agenda slide. Your hosts for today's call are Duke Austin, Quanta's President and Chief Executive Officer, and Derrick Jensen, Quanta's Chief Financial Officer.
This slide shows the agenda of the call and our presentation this morning. A PDF version of this slide presentation is also available in the Investors and Media section of the Quanta Services website. Following our prepared remarks, we're happy to take your questions. We ask that you keep your questions to topics related to the acquisition of Stronghold. With that, I will turn the call over to Duke Austin for his remarks. Duke?
Thanks, Kip. Good morning, everyone. We are excited to welcome the Stronghold Company's management team and all of the Stronghold employees to the Quanta family. Stronghold is a leading specialized service company that provides high pressure and critical path solutions to the downstream and midstream energy markets. Headquartered in La Porte, Texas, Stronghold is led by a strong multi-generational, experienced, and high-quality management team. Like Quanta, Stronghold has a safety-focused culture. In fact, Stronghold's safety record is world-class and leads the industry. Stronghold also has an entrepreneurial culture and is dedicated to employee training and operational excellence across the organization. As a result, Stronghold is a preferred employer with a skilled, dedicated, and high-quality workforce averaging approximately 2,800 employees. These important characteristics that have resulted in Stronghold achieving an excellent reputation and building strong and high-quality customer relationships.
Founded in 2002, the company initially focused on providing catalyst handling services to the downstream industry and is considered a leading provider of those services. Since then, Stronghold has achieved strong organic growth by leveraging its success in catalyst services and operational excellence to expand into 10 distinct specialty service companies, which provide future growth platforms. Turning to the next slide. Our acquisition of Stronghold should allow us to capture a greater portion of the energy industry spend and offers compelling cross-selling opportunities. Stronghold's customer base is complementary to Quanta, and we believe we can expand Stronghold's services to Quanta's existing customer base and vice versa. We believe a solutions-driven approach based on our collective core competencies will further enhance our ability to grow the industrial services market.
We also believe the specialized industrial services market is a natural service line expansion for Quanta that will enable us to further meet our customers' needs. Stronghold gives Quanta a significant presence in downstream services and a strong platform for growth. Importantly, Stronghold is led by an experienced, well-respected, operations-focused management team. Stronghold's focus on safety, entrepreneurial mindset, dedication to quality and customer service, and position as a preferred employer in the industry makes for a strong cultural fit with Quanta. From a financial perspective, Stronghold has attractive historical organic growth and an accretive margin profile, low CapEx requirements, and solid cash flow generation. We expect that the transaction will be accretive to Quanta's earnings per share this year, with accretion expected to increase in 2018 without the benefit of any operational synergies.
Stronghold's operations are mostly recurring repair and maintenance and smaller capital projects that tend to be fairly consistent and less variable than larger project work. Finally, as many of you know, shale oil, natural gas, and natural gas liquids production has grown dramatically over the last seven years, which is driving refinery, petrochemical, and storage infrastructure investment needs. Now to slide six. Stronghold's service territory covers the majority of the U.S. Importantly, Stronghold has a strong presence in the strategically important Gulf Coast market, which is home to the majority of North America's refinery and petrochemical production facilities. Like Quanta, Stronghold has a high quality and diverse customer base consisting of many of the world's leading refinery, petroleum, and chemical companies. Over to slide seven. Stronghold generated revenues of approximately $500 million in 2016.
Many of the specialty service solutions that Stronghold provides are critical infrastructure that operate in a complex, high pressure, and corrosive environment. As you can see from this slide, Stronghold provides a variety of services to the energy industry. Approximately 85% of Stronghold's revenues were attributable to providing various downstream services. More than half of Stronghold's revenues last year were associated with providing specialty catalyst and turnaround services. Approximately 15% of revenues last year came from providing midstream services. Because Stronghold's work consists of recurring repair and specialized services and smaller capital projects, most of their services are performed under time and material contracts. Turning to slide eight, Stronghold gives Quanta a significant presence in the downstream market services and strong platform for growth. Much of Quanta's leading oil and gas service capabilities are in the midstream space.
Stronghold specialty downstream services are complementary to Quanta's existing service offering and expands our industrial services capabilities. As you can see from this slide, the combination of Quanta's and Stronghold's services creates what we believe is an unmatched comprehensive infrastructure solutions offering to the energy market. Importantly, Stronghold should enhance recurring revenues in Quanta's Oil and Gas Infrastructure Services segment. Now I'll turn this call over to Derrick for a financial overview of the transaction. On to the next slide.
Thanks, Duke, and good morning, everyone. On July 20, 2017, we acquired Stronghold. The upfront consideration paid to Stronghold stockholders was approximately $450 million in cash and stock. This consists of approximately $360 million in cash and approximately 2.7 million shares of Quanta common stock valued at approximately $90 million. Further, there is a cash and stock earn-out opportunity for a maximum additional consideration of $100 million based on cumulative three-year EBITDA through mid-2020. We financed the cash portion of the upfront consideration with borrowings under our credit facility. For the full year 2016, Stronghold generated revenues of approximately $500 million and had high single-digit operating income margins, which would have been accretive to our oil and gas segment margins.
We expect revenues to Quanta for the 2017 post-acquisition period to be between $240 million and $260 million, with a relatively equal contribution to the third and fourth quarters of 2017. We believe the non-GAAP adjusted diluted earnings per share contribution will be $0.06-$0.07 for 2017. We are still finalizing our purchase price allocation and our estimates for the fair value of intangibles and related amortization are very preliminary. But we currently estimate amortization expense net of tax will be between $2 million and $2.5 million for post-acquisition 2017. Also, we estimate acquisition and integration costs net of tax will be between $3 million and $4 million, with $1 million of these costs impacting Quanta's second quarter 2017 results. Non-cash stock-based compensation costs net of tax are expected to be around $500,000.
As a result, we estimate GAAP diluted earnings per share accretion to Quanta for 2017 to be between $0.02 and $0.03. Looking forward, we believe Stronghold has the opportunity to grow double digits over the next several years with an attractive margin profile, which we anticipate should increase earnings per share accretion going forward without considering potential operational synergies. It is important to note that this transaction has a sizable contingent earn-out. The accounting for this earn-out in future periods may result in significant impacts to GAAP earnings per share. As a result, we believe it will be important for investors to consider both GAAP diluted earnings per share and adjusted diluted earnings per share reconciliations in future periods. With that, I'll turn it back over to Duke for additional comments beginning on slide 10.
The strong growth outlook for the end market served by the industrial services industry is supported by multiple attractive market dynamics. The U.S. shale revolution has had a profound effect on global energy markets and creates a favorable dynamic for the industrial services market in the United States. Process facility utilization rates, capacity expansions, and structural advantages that the U.S. downstream industry enjoys, particularly along the Gulf Coast, should continue to create demand for specialty industrial services. These and other factors are expected to require significant capital and maintenance investment for years to come, which we believe Stronghold will benefit from. I'll dive deeper into these drivers in the next few slides, starting with slide 11. North America is the largest downstream maintenance market in the world, estimated to account for approximately one-third of the global maintenance spend from 2017 through 2021.
The U.S. Gulf Coast region is the largest downstream market in North America, which is where Stronghold has a significant presence. The Gulf Coast downstream industry has a number of strategic advantages for hydrocarbon processing, including the region's proximity to a robust supply of shale and conventional hydrocarbon resources for feedstocks and fuel, and the region's long history as a key energy hub. As a result, there is extensive energy and industrial infrastructure already in place that facilitates the economic processing and transportation of hydrocarbons to domestic and international markets. Moving to slide 12. The shale revolution, coupled with long-term positive outlook for continued hydrocarbon production growth, provides a favorable environment for process industries. As you can see on this slide, U.S. production of oil, natural gas, and NGLs has increased dramatically and is expected to continue to increase for several decades.
U.S. downstream and integrated operators are benefiting from a structural advantage of being close to this abundant supply of oil and natural gas, which creates opportunities for them to capitalize on a greater volume and throughput at processing facilities. These dynamics are expected to drive continued investment in downstream facilities. Turning to slide 13. Despite a decline in refinery count as refineries are decommissioned for economic or other issues, refining capacity has increased for nearly two decades due to the expansion at existing facilities. Expansions have been favored over new builds because they are lower risk, less capital intensive, can be completed faster, and can generate better returns. Despite the increasing capacity, process facility utilization rates have remained at historically high levels due to the abundance of shale-produced hydrocarbons, increased demand for refined products, and the cost advantages that domestic processors have over international competitors.
Downstream facilities in the U.S. Gulf Coast region, in particular, have structural advantages that should allow for sustained higher utilization rates and continued facilities investment going forward. On to slide 14. There is a substantial installed base of industrial facilities across the U.S. that operate in a high pressure and highly corrosive environment. Production at these facilities fluctuates, sometimes significantly, to capitalize on changes in commodity prices, which increases wear and tear. The average age of the industrial plants and related infrastructure continues to increase. These facilities require consistent, recurring maintenance to keep infrastructure running safely and efficiently. Additionally, as U.S. planned petrochemical capacity expansion increases, industry CapEx are expected to grow significantly. Further, there are a number of new LNG export facilities approved or under development that will require significant capital and maintenance investment. Increased production of domestic oil and refined products should require increased storage tank capacity.
As a result, storage tank capacity is expected to increase more than 20% from 2016 through 2022. And, higher utilization of existing tank infrastructure should require ongoing maintenance and repair investment. The combination of these favorable dynamics are expected to drive continued investment in downstream facilities and infrastructure for some time. Turning to slide 15. The Stronghold acquisition fits very well with our strategic imperatives for long-term profitable growth. Stronghold leads the industry in safety. Their focus on treating employees well and providing high levels of quality and service to customers has resulted in a high performance culture. The Stronghold acquisition strengthens and provides opportunity for growing our core. It is a leading platform in the downstream services market, expands our existing industrial service solutions offerings, and provides opportunity to capture a greater portion of the energy complex spend.
We strive to stay ahead of the industry trends and believe the demand for specialty industrial services will increase over the coming years. This acquisition, as well as favorable growth dynamics in the downstream market, should grow our recurring revenues with an attractive profitability and return profile. Stronghold provides a unique opportunity to add a company to the Quanta family with a multigenerational, operationally focused, and successful management team that fits Quanta very well, both strategically and culturally. Going to slide 16. In summary, the Stronghold acquisition aligns with Quanta's strategic imperatives for long-term profitable growth. The industrial service market is a natural and complementary expansion for Quanta, and Stronghold is an excellent platform to expand our specialty industrial services solutions to meet our customers' needs. We believe end market drivers and growth opportunities for downstream infrastructure solutions are attractive and should create growing demand for Stronghold services.
Combining Quanta's leadership position in the midstream infrastructure service solutions with Stronghold's downstream specialty service solutions allows us to provide a comprehensive solutions offering that we believe is unmatched in the industry. We believe this will allow us to capture more of the energy industry capital spend. Stronghold's focus on recurring repair and maintenance and smaller capital programs should enhance our recurring revenues. Finally, we believe Stronghold's financial profile, the terms of the acquisition, and the strong management team leading the company are attractive and will continue to contribute to our efforts of creating long-term shareholder value. With that, I would like to turn the call over to the operator for Q&A. Operator?
Thank you. At this time, we will be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow as many as possible to ask questions today, please ask one question and one follow-up question. One moment, please, while we poll for questions. Thank you. Our first question is from the line of Noelle Dilts with Stifel. Please proceed with your question.
Hi, guys. Thanks. Good morning, and congratulations.
You are welcome.
My first question was just, some of the companies I follow that have exposure to the downstream maintenance and turnaround market have maybe seen somewhat mixed results over the past three years with refiners kind of delaying some work, deferring some work, and also going through smaller scopes of maintenance. That has led to our view that maybe there is some pent-up demand in the market. My first question would just be, one, how have Stronghold revenues trended over the last three years? What is your view on potentially that deferred maintenance work in the system? Then if you could give us a sense of the exposure at Stronghold to refinery versus petrochem.
Yeah. Thanks, Noelle. Good questions. Again, I think from our standpoint, what we see in the company is it has grown solid double digits over the last five years. From that standpoint, the company is growing nicely. It is 10 services and specialty service companies within Stronghold, so they do provide a lot of solutions. I think what is different and what we see different here is it is in corrosive environments, it is high pressure. Again, it is the need to replace and do replacements on the services we provide. They are critical path solutions to the downstream markets. That, coupled with what we already do from an industrial base, we see a really nice solution-based platform that we can continue to grow up and down the value chain of the CapEx and OpEx of our energy clients as we move forward.
There is some pent-up demand on the turnaround seasons and the clients that we work for across the broad spectrum. Next year, it will be really nice, and then therefore, based on the turnaround schedules that we see. Again, like you said, pent-up demand.
Okay. Second, given that you have this sort of mixed exposure to both just the more ongoing maintenance and then the turnaround, can you give us a sense of the seasonality of this business? Because I know that that turnaround work can be extremely seasonal.
Yeah. It is counterseasonal to what I would consider our gas business now, oil and gas business. But primarily in the first quarter, we see that being one of the bigger quarters. The last quarter can tell off or be big. It just depends on the CapEx of the clients. But counterseasonal to what you see now in our oil and gas business.
Thank you. Our next question comes from the line of Jamie Cook with Credit Suisse. Please proceed with your question.
Hi. Good morning. Congrats on the deal.
Good morning.
I guess a couple questions. One, Duke and Derrick, I am assuming in the numbers that you guys have provided today, you do not assume any revenue or potential cost synergies. I am just wondering how to think about those over the longer term would be my first question. My second question, I think, Derrick, you said margins are like the high single-digit range. Is that fairly consistent? Is there any variability associated with that? Last, how much visibility do you have with this type of work? Do you have a good backlog? Is it sort of book and burn type work? I am just trying to think about the visibility associated with this work. Thanks.
Yeah, thanks, Jamie. First, the synergies. When we look at it from an operational standpoint, we've not included any operational synergies in this deal. I'll let Derrick speak to the other synergies that's in here. What we see from an operational standpoint, we can cross-sell across our customer base, our existing customer base that we have now. We're very much involved with the energy clients today on the high voltage side of our business, which is a critical path. This business allows us to do some catalyst handling, some other things that are very much critical path in a turnaround. We do see opportunities for us to pick up synergies and cross-selling on an operational standpoint. We're not prepared to quantify that at this point, but we know they're there, and it will be upside to this deal as we move forward.
On the tank side, as we look at the tanks, we provide very little tank service on the midstream business. The clients that are downstream now that we perform tank work for, the businesses that we have here are very good quality business that we bought. We'll be able to take the tank business, both maintenance and CapEx, over to our midstream customers we're pleased with. We'll also be able to add some engineering capabilities that we have on a midstream basis and do some small EPC or other EPC work in the downstream space. It's really exciting for us, boots on the ground, recurring revenue type business for the longer term. We continue to see and find synergies as we look at it on a daily basis. Again, we'll communicate that as we move forward. I'll let Derrick comment on the numbers.
Yeah, Jamie, from a margin perspective, Stronghold is very good in its consistency over the periods and the margin profile on an annual basis on the upper single-digit range. You will see some movement during the year, as Duke spoke of kind of that March and April turnaround season, kind of September, October turnaround seasons.
You can see a higher margin profile with lower margins, maybe it's batted around that based upon the volume of revenues. There's a bit of seasonality to the year on the margins, but overall, on an annual basis, very consistent margins in that upper single digit. Relative to backlog, the acquired backlog was probably around $250 million for the 12-month backlog. For total backlog, a substantial amount of the work is performed under MSAs, of which a significant amount is performed under evergreen contracts. Thus, we continue to analyze these historical spending patterns to quantify that total backlog number that we're going to feel comfortable with. I don't have that number now. I'll tell you that we'll feel comfortable with that by the time we get the 3Q17 results. But as of now, the 12-month acquired backlog we call out to be about 250.
Our next question comes from the line of Matt Duncan with Stephens. Please proceed with your question.
Hey, good morning, guys. Congrats on the deal.
Thanks, Matt.
First question I've got is just trying to get a little bit more of a breakdown of the revenues here. How much of it is really coming from the catalyst handling stuff versus the other industrial services? As you look at it in terms of work that's done while refineries and petrochem plants are up and running versus things that are done during turnarounds, what does that breakdown look like?
Yeah, again, we're not prepared to break down the subsectors to that degree. But what we'll say is about 50% of the business is kind of recurring repair, maintenance, turnaround type work, and then the rest of it is such that it's midstream, downstream tanks and piping and such like that, and about 15% of it's CapEx up in the midstream.
Okay. And a couple of small ones. On the use of stock in the deal, was that something that they wanted, or was that something you guys wanted to include to sort of keep the management team moving forward here? And then, Derrick, maybe I didn't hear it, but did you say what the EBITDA margins are of this business?
Yeah. So I'll address the first one. The management team and ourselves, we talked about this for a while, about a year, and very much aligned in where we're going. It's a young management team that we're very pleased to have. Culturally, it couldn't be a better fit. They wanted our stock. We thought it was important that they had some of our stock. We both think it's going in the right direction. From that standpoint, we needed the alignment, wanted the alignment. Obviously, there's an earn-out as well on this. The management team that we acquired here, which is what's very much important in this deal, is top-notch. We're extremely proud of what we have, and they'll fit great in where we're going and the solutions that we're trying to provide to our clients.
And I think it's important that you understand that we're trying to do exactly what we said, is grab the value chain, the spend, the CapEx, the OpEx of our clients. The 10 names of this business of Stronghold that are underneath are very well respected, much like Quanta on the power side or the gas side. So we've got a great platform to move forward and grab the value chain of our customers, which is what we're trying to drive. And I'll let Derrick comment on the rest.
Yeah. The EBITDA margins are double digit.
Thank you. Our next question comes from the line of Tahira Afzal with KeyBanc. Please proceed with your questions.
Hi, Duke and team.
Morning.
Morning.
The first question, Duke. You have two markets that are doing really well or about to inflect very strongly, if anything, and you've talked about them, your core markets. You've got the telecom initiatives you're just putting in place. Can you explain why this is a better sort of use of cash than maybe perhaps investing in your telecom business, where visibility from all the numbers we see seems even stronger? Can you try to address concerns that you might be trying to do maybe perhaps too much at a time when your core markets are just starting to inflect and get more busy?
Yeah. Thanks, Tahira. Again, I think for us, this is not precluding us from growing our telecom business. We certainly looked at all ways to drive shareholder value here. We talked about, we've just announced a buyback. We've done other things in the telecom side. Certainly, this does not preclude us or our balance sheet. We have a strong balance sheet. This was a unique opportunity for us to go up and create value to our customers, and we believe that it was the right use of capital as we looked at it today to drive the value chain going forward. Also, our customers are pushing us in directions that are asking us to provide more services. Boots on the ground capabilities are something that will be necessary as you move forward, which I think goes unnoticed.
As we get bigger and larger in the energy space and the clients that we serve out across the downstream markets and the midstream markets, it's necessary for us to be able to have different service lines and platforms with quality companies. From what we see and what we know on the market, in the downstream market, we bought the very best at what they do, and we're extremely pleased with that management team and what we'll be able to do with it on a go-forward basis. We have been in the industrial space on the high voltage side, maintenance, and construction for many years, over 50. We do understand the market and what's going on in the complex. Also you're seeing a lot. LyondellBasell said something today, I believe, or yesterday, about a $2.5 billion plant in Houston that's going forward.
We still continue to see petrochemical and refining capacity move forward on the Gulf Coast, albeit some, when you look to the non-efficient refineries, you've seen some of that dissipate. What we see is the bigger refineries are continuing, and the petrochemicals are continuing to build and add infrastructure. As that gets added, it's necessary to provide the maintenance going forward. What Stronghold gives us is 10 different companies in a variety of ways to grow Quanta's platform in the industrial spaces.
Thank you. Our next question comes from the line of Chad Dillard with Deutsche Bank . Please proceed with your questions.
Hi. Good morning. Congratulations, guys.
Hey, thanks, Chad.
Just wanted to dig in a little bit more on the MSA component. I would love to understand what the average length of the MSA agreement is, and what percentage of those revenues are up for renewal, and do you have any greater than 10% customers?
Yeah. Actually, they have got customer concentration, probably top 10 customers represent about 65% of their revenues. No customer exceeds 20% of their revenues. As far as the MSAs goes, I do not know if I can give you an average life. I would tell you that a large number of them are evergreen. Such that contractually, they do not technically expire. There are a few that are one year and a few that are three years, but a large number of the MSAs themselves are evergreen contracts.
Did you guys provide an EBITDA multiple for the transaction? You guys have always kind of communicated your M&A framework that you focus on companies that build more linear infrastructure. Maybe you could walk through how that thought process has evolved and brought you to acquiring Stronghold.
Yeah. We hadn't commented about the EBITDA multiple, but I would tell you that on a current year basis, it's about an 8x deal. Then, as to what led us to this, I'll come to Duke.
Yeah. I think in general, I didn't hear the exact question, but all I can tell you what led us this way is that from our standpoint, as we looked at the industrial spaces and what's going on and our clients as we performed high voltage work in some of their core critical paths, it became evident and necessary for us to kind of move that service and specialty line in a different direction, which is boots on the ground capabilities in the downstream markets. This is a platform company, very best. The kind of companies that we acquire with a management team that understands growth, understands entrepreneurialism, and client-based, client-focused, and a specialty contractor that wants to provide solutions.
Again, uptime is extremely important for our clients and our ability to provide a solution that decreases the downtime of these industrial complexes and turnarounds is something that we're very much involved in. This is a solution-based company that gets it, that's boots on the ground, that fits us culturally perfectly. It's exactly what we said we would do, is drive the energy capital off that spend, the value chains, and this is something that does that across a broad spectrum of energy companies that we have performed work for today or vice versa. They perform work for that we'll be able to take our capabilities over to their clients. So very much aligned synergistically. Very little overlap in customers. So we're excited about it.
Our next question comes from the line of Steven Fisher with UBS. Please proceed with your questions.
Thanks. Good morning.
Morning.
Morning, Steve.
As you think about where this business could go over the next few years, you mentioned it's a platform company. Is this a business that you think could grow to be a billion-dollar business through organic and inorganic, or is it a more modest target?
No, Steve. Again, I think for us making this kind of acquisition, and many times we've said we think they're billion-dollar platforms, certainly this is one. We can see it. We can see the growth. The company's proven they can grow hot. Mid, kind of double-digit growth there. We're extremely keen growth. We're extremely happy with the platform and what we can do with it and the synergies that we think we can add. Culturally, I think the way I see it's the right fit for us.
Okay. You mentioned in the release about the strong free cash flow generation. You said double-digit EBITDA margins. Can you just give us some numbers on what the cash flow profile is and how consistent that is? Also just kind of curious on the sort of their CapEx over the last few years. I want to make sure they've been consistently investing.
Yeah. They've had about CapEx of somewhere in the $10 million-$12 million range over the last few years. I think as we go forward, we would probably anticipate something along that same lines, maybe even an ability to reduce some of it based upon the mix of work. From a depreciation standpoint, I would tell you the depreciation run is probably fairly comparable to CapEx. So it gives you an idea of the overall free cash flow. It's accretive to Quanta's.
Our next question comes from the line of Alan Fleming with Citigroup. Please proceed with your question.
Hey, good morning, guys. Duke or Derrick, maybe you can talk a little bit more about that lump sum piece of the business. I see it's 25%-30%. What's Stronghold's track record of execution been like on that lump sum or fixed price work they've had? Have they had any big cost overruns? Are there any big projects in that backlog or bigger projects that we need to kind of be aware of?
Yeah, it's about 15%, it's primarily around the tank side where we're building tanks on a project basis from that standpoint, it's their business. We like that business. We understand it as well on our side on the midstream. Their capabilities give us a platform for the midstream business. We like it. We looked at it. In the backlog today, there's not any large projects that are material to this deal.
Okay. Derrick, maybe on the financing. You're going to borrow against the credit facility. Are you comfortable keeping that or are you going to turn that debt out? How are you thinking about that?
Yeah. This deal puts us still yet pretty firmly in our targeted range. We talked about we'd be comfortable with the profile of between one and one half times EBITDA. I think that will keep us right there. As far as going forward, it's going to depend upon what other strategic type deployments of capital we have. Right now, I think that we have the ability to see internal cash flow reducing that debt balance. But at the same time, we do have our buyback program in place and other M&A type activities which will decide what our ultimate balance is on a go-forward basis.
Our next question is coming from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your questions.
Great. Thanks. I wanted to build on an earlier question just regarding the company's double-digit growth rate. I just wanted to clarify that that was an organic growth rate. Then get some context if it was. I think there was a comment earlier that it's been choppy for the competitors in this business. Organically, some of these competitors that do turnarounds and involves another down 20, 25% plus in the last couple of years. I am trying to understand what's so different about this business as to why it grew, presumably organically, double digits.
Yeah, good morning. Again, the business is made up of 10 specialty companies, and I think as you look at it, there's mature companies within it and companies that are growing. We see the downturn a bit in others as an opportunity with this business. It's an employer of choice. They've been able to grow it. Again, like we said, mid double digit there. Strong growth throughout the last five years. We continue to see that going forward, able to capture new business, able to do more things for the client. We really provide critical path solutions to the downstream market and the energy customers. As you do that, it allows you to advance solutions to work on the uptime of our customers.
I think if you think about it from a solution based, working on the uptime of our customers and have a customer focus, you're able to grow your business much like we have on our power and gas side over time. That's what this company does and will continue to do.
All right. Maybe as a follow-up question, I wanted to understand the labor model underneath this. A lot of your existing businesses have the labor presence where you can kind of grab labor from the union hall, and as the project wraps up, send them back to the hall. Given the high degree of seasonality here, and you talk about average workforce, so I have to imagine it fluctuates quite a bit. Can you talk about how you manage the labor to make sure that the utilization is high given the fluctuations in demand?
Yeah. I think, again, labor is something that we understand quite well. It's boots on the ground labor, and the company is an employer of choice. It's operational led. They understand the labor forces and how to attract, retain exceptional labor. I'm not worried about the labor going forward. The specialty services that we provide are on the higher side of any wages down in the complexes. That being said, it is a non-union type environment, but our ability to retain employees has been well. It's not a play where it's cut wages. It's more about paying the right kind of wage for the service that we're providing and providing the value to the customer. Because we're more productive, safer, and you provide a solution. That's what this company is. It's not about cheap labor.
That being said, we're able to attract and retain our employees as we move forward, and it is an employer of choice, similar to Quanta.
Thank you. Our next question is coming from the line of Adam Thalhimer with Thompson Davis. Please proceed with your questions.
Hey, good morning, guys. Thanks for doing the call.
Thank you.
Yeah.
You said accretion in 2018, you expect it to be higher, is it up? Derrick, is it up on revenues alone or is there something else that drives additional accretion next year?
Yeah. I think the 2018 right now, we looked at revenues probably in the $575 million-$600 million range and adjusted EPS in something like a $0.10-$0.15 range.
Okay, great. My other question is what's the EBITDA target for the earn-out?
It's got a threshold, but we're not really in a spot to discuss what that threshold is. We feel comfortable that the numbers at a spot that returns value to both the company as well as to Stronghold. It's a level that we feel comfortable that it's going to bring the right level of motivation from a growth perspective and return to shareholders.
Thank you. Our next question is from the line of Martin Malloy with Johnson Rice. Please proceed with your questions.
Good morning. I was wondering if you might speak a little bit about the competitive environment in some of the end markets and who Stronghold is competing against. Is it private regional companies, or is it segments of larger public companies? Also, maybe if you could speak to how this company has grown over the years and how you expect it to grow in terms of, is it displacing competitors or taking services that some of the owners used to do internally and outsourcing, going to companies like Stronghold?
Yeah. I think in general, as you look at the company and you look at the competition, there is regional competition along different service lines within Stronghold. There's 10 different specialized service companies within the platform. As you see that, each one of them have different competition. I think from our standpoint, our strongest public peer would be Amec, with their acquisition there that they've made in the past. That would be something that their industrial side would be similar to something that we're doing, albeit a little different. That being said, there is competition out there. I think from our standpoint, we've been able to grow the business through our main catalyst handling was how we started the company. They grew that from there, doing a really nice job for the customers. The customers continued to ask them to provide different services.
It's the critical path. Some of the things that we do from a high voltage side is a critical path. When you combine all these things together, I think it's a very compelling situation that we can talk to the client about providing a solution which decreases some downtime and helps them on turnarounds and maintenance as we move forward. I think all that being said, it's really about the main pieces of business, the pieces of business they continue to grow on the turnaround and maintenance side and their reputation to come in on time, on budget, and very safe company. Our clients respect that and think it's necessary to go forward, and we continue to build services off that reputation.
Okay. I just wanted to be clear on, so for the turnaround services, Stronghold's contracting directly with the owner of the facility, typically?
Yes. There's a slide that kind of gives a customer base there. Really nice customer base in the energy market.
Okay. Thank you.
Thank you.
Thank you. At this time, I will turn the floor back to management for closing remarks.
Thank you for joining us this morning. We're real excited about the acquisition, and we thank the Stronghold employees and look forward to working with them as we move forward. This concludes the call. Thanks again.
Thank you for your participation today. You may now disconnect your lines at this time.