Michelle Herman – Investor Relations, FTI Consulting Kevin Matz – Executive Vice President, Shared Services Tony Guzzi – President and Chief Executive Officer Mark Pompa – Executive Vice President and Chief Financial Officer.
Adam Thalhimer – BB&T Capital Markets Alex Rygiel – FBR Capital Market John Rogers – DA Davidson Tahira Afzal – KeyBanc Capital Markets.
Good morning. 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 mote to prevent any background noise. After the speakers' remarks, there will a question-and-answer session. [Operator Instructions] Thank you Ms.
Michelle Herman 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'd 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 earning 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 2.
Slide 2 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; Mava Heffler, Vice President of Marketing and Communications; and our Executive Vice President and General Counsel, Sheldon Cammaker.
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 this at emcorgroup.com. Before we begin, I want to remind you that this discussion may contain certain forward-looking statements.
Any such statements are based upon information available to EMCOR management's perception as of this date, 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 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 is going to cover both the quarter and year-to-date in detail.
In my discussion I will be talking pro forma numbers, which excludes the sell of a building last year and the focus will be on continuing operations. We earned $0.66 per diluted share versus $0.57 in a 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 of segments had organic revenue growth in the quarter. We had operating margin of 4.1% compared to 3.9% in the year ago period, and 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 and also a 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 continue to see growth as it 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, whereas 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 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 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. 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 businesses had a very strong quarter with 40% organic revenue growth, an 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 – burn 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 the volume, there is less equipment bidding out there, and as a result of reduced volumes, pricing competition has accelerated.
You can see this in our backlog in the segment, which was – we had discussed many times, 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 our businesses in our outlook section when we wrap it up. In our UK 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 loss 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 one 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, UK and Construction. We do wish that we were not losing backlog for our Industrial segment shops. Our balance sheet remains liquid and strong, and we have confidence in the cash flow of our business.
And as a result of that, our board has authorized us to repurchase an additional $200 million of our shares. And with that, I'll 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'll 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.
So 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 up all 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 included $1.7 million of revenues attributable to an acquisition within our US Mechanical and Construction Services segment, and therefore our organic revenue growth for the quarter is 8.3%.
US Electrical Construction revenues increased 9.4% to $344.4 million. Consistent with the revenue performance in the second quarter this segments 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 the segments backlog at September 30, 2015 when compared to the backlog as of December 31 of last year. US Mechanical and 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%. US 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 a 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.
US 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 $97 million increased $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 $7.6 million.
Consistent with their second quarters rent, the increase in revenues is due both to new multiyear contract awards, as well as expansion of small project activity. Please turn to Slide 7. Selling, general and administrative expenses of $165.1 million, represent 9.7% of revenues in an increase of $5.1 million from quarter three 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&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 was 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 US Electrical Construction Services segment operating income increased $4.9 million to $25.5 million with the 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 products.
US Mechanical and 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 do 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 segments backlog, we're confident in Mechanical Construction's ability to continue to improve their performance as they have on a year-to-date basis through September 30.
Our total US 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 US Building Services decreased approximately $3.4 million to $16 million, 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 in 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 this 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 access 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 $3.4 million represents 3.5% of revenues which is an increase of approximately $300,000 and is essentially flat from an operating margin comparison for 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 organic revenue growth. We are now on Slide 8.
Additional key financial data on this slide not addressed during my highlight 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 US Mechanical and 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 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 [indiscernible] and Tony certainly did mention this, that the results of our operations for the third quarter of 2015 set new company records for the third quarter with 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 the results for the nine-month period ended 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 had 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 it has resulted in an increase in our overall SG&A 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.
And 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 GAAP on a pro forma basis that was generated in the first quarter of this year due to both the nationwide refinery operator strike and 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 or benefitted 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’s year-to-date adjusted diluted earnings per share would be $1.82 as compared to 2015 $1.92 per share, representing a 5.5% increase year-over-year.
Lastly on the 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 on positive strength and liquidity of EMCOR’s balance sheet during his earlier remarks as our leverage continues to reduce at 17.5% at September 30. 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 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 and tangible amortization expense.
Total debt is approximately $322 million with the change from December 31, 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 that 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. And I’m going to try real hard not to be redundant we have been working 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 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 and almost $0.5 billion in most of that work with in Las Vegas. Today, that equivalent backlog is $60 million.
So 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.
Now 2015 is a growth market for non-residential construction, an 8.55% revenue growth for the quarter, it’s a growth market for EMCOR with 8.3% of that in solid growth and both of our Construction segments, 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 the predictors have been ahead of what the market has.
Have been on balance, it is growing now and the reality is we've been more right than wrong about the trajectory of this nonresidential recovery. We think it is strengthening right now, as it goes into 2016.
Now, 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.
So to put in perspective this recovery, it will take it at its current momentum and as with better momentum in 2015 and continued momentum in 2016, it will be somewhere in the middle of 2017 likely, till it gets back to 2008 levels. One can talk about it being the last decade of nonresidential. 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 can see good prospects there, we’ve 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 want some nice work there, we just want a nice milk processing plant that we will do on a designed build basis, it’s 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 at 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 go on over three or four years.
Bidding remained strong, and 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 our margin is? Well, they’re certainly better than they were at the trough, but they certainly haven’t recovered where they were pre-2008 levels, and it’s not only margins that haven’t recovered at that point, the 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.
That means it’s just not as favorable to get ahead of it. 2015 will be a growth year non-res like I said, as well 2016. So 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 [indiscernible], you saw in our backlog growth where 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 stopped.
And that market is 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 US, we do a little bit of work in Latin America too, and that market is down substantially too with the lower price of crude.
So in reality, we’re a big company, we – on the non-res markets, and 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 non-residential market with a little bit of retraction or quite better retraction in our Industrial segment with new heat exchanger builds as large integrated oil companies sort out their capital needs.
I think now we’re going to go to Page 13 and 14, and I’m going to talk, really I guess I’ll 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 $6.6 billion to $6.7 billion. So 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 to $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 nonresidential 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 and outside of the strike, we would have a very good performance in our Ohmstede Field business.
You have refiners today with pretty good crack spreads, 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 two very strong quarters in our Industrial segment, driven by – and in one way 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 are 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 number of years and throughout this year, and really had overcome that headwind from those government JVs, quite frankly we’ve talked that at [indiscernible] and we’ll pretty much be done with that as we get exit this year.
We had two more – we have more right going on than not at EMCOR right now. But those of you know that know 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 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% 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 didn’t you have better drops, and we had good drops, we had 8.3% organic growth and about 13% operating profit growth in the quarter.
We would like to see more and we’d like to be seeing some margin expansion with that, both our mix of work and a lots 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 $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. 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. And Q3 we’d tell you we’d tell you we’ve had pretty good strong added growth and our guys are executing really well right now.
And the non-residential market continues to improve because we had backlog growth despite that strong organic growth. So 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.
So 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 are struggling with a 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 a strong as it was last year.
Last year was an exceptional fourth quarter on our Industrial business, really driven by some of the specialty services we provide, coupled with really strong shop performance.
And we’ve had growth of over 20% in the last five quarters in our Industrial segment, so we throw a little caution on that, and say could fourth quarter be as good as what fourth quarter was last year. And at the low end of the range it’s not, at the top end of range it would be at least that good.
In the course, a little snow in December would help our results.
So 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, or strong organic growth, you always generate cash, so what are you going to do? We talked in our second quarter call about – we thought the business development activity was a little busier and it is.
But quite frankly, we’ve looked at a couple of substantial builds this year. We walked away from a several of them because of a weakening outlook and we just couldn’t get agreement on what that outlook look like, we’re pretty sure we were right or we were simply outbid. And we’re going to maintain our discipline.
We are known for that and if we’re going to pay up for something this 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 that – how we are going to get the synergies, and it adds to our geographic or some type of service, we can offer either on the Construction Building Services or Industrial side.
Whether significant, or be significant to that part of our portfolio in a sense that we’ll be able to do more work, is it significant to EMCOR overall, not as much as we would like it to be on a year-to-date basis as far as the deals we’ve done. So you’ve got the strengthened cash flow.
Expect to continue to have strengthened cash flow, you have a very liquid balance sheet. So our Board has authorized us to go purchase an additional 200 million in shares and we have about a 140 million left on the remaining authorization. And we’re certainly not going to be specific about how that will roll out over the next 12 months 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, and like Mark said, on a year-to-date basis, we expect records on a number of places through the nine month period. Our company is performing well.
We’ve got a little bit of headwind in the oil and gas sector for some of the capital work we do. And with that I’ll take questions..
[Operator Instructions] Your first question comes from the line of Adam Thalhimer of BB&T Capital Markets..
Hey, good morning, guys, nice quarter..
Thank you..
Turning 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. We want the balances – here is 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 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 scheduled 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, I mean, currently we’re scheduled to do a lot of work, back-in change and we usually bring that into more crystal view. And the real 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 our Industrial services business that lost work because 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.
So put it all together, we’d know, but I guess, 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.
And then on the Mechanical side, it look like you had a couple of projects that brought down margins, maybe a touch in the quarter, are those done now, or is there may be a lingering effect there?.
Well, part of it is – and I’ll market into it a little more, part of it is, we’ve learned from working in the government 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 is necessary this quarter is that the completion date was extended, not due to our work, but because of work of others on the job.
And at this point, we haven’t received a change order for extended overhead, 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, and unfortunately at this point, we’re not in a position to offset it..
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, but 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 [indiscernible] really started to come in, its got much more difficult to get money that you’re entitled to, and so we take a conservative view because it’s becoming unknown..
Okay. I’m sorry if I missed that, but how – how much was that right down..
It wasn’t significant enough to disclose discreetly, it’s – if we had recovery it may warrant some level of disclosure beyond what we’ve provided today..
Okay. Thanks guys..
It’s not a big execution issue here. It’s a timing issue with respect to like Mark said, something slip to the right it had nothing to do with us..
Got it..
Your next question comes from the line of Alex Rygiel of FBR Capital Market..
Thank you. Good morning guys..
Good morning, Alex..
Good morning, Alex..
Hey Tony, can you sorry or 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 the fourth quarter in 2016.
Can you go into little bit more detail sort of in the end markets that you think are going to be some of the buyer catalysts?.
Sure. I think industrial non – so 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. And potentially we may see some signs of life and healthcare..
And 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, but 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, 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 that remains is in addition to the 200 that’s new, correct so total 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..
Good morning, John..
Hi, good morning. If we could just go back for a second to the Q4 implied guidance here. The mid-point of the revenue range suggests overall revenue, really no revenue growth.
Is that all Industrial Services?.
Yes..
I guess, Tony from your comments Construction market is getting better..
Yes, two things, John, on the Industrial Services and it would headwind from the government JVs. You’re not getting to see the underlying growth that we in Building Services because the year-over-year impact of those JVs..
Okay, and then is 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. 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 electrical, 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, it opens up geography to us or customers to us, or give 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 new product line within the 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 the market sometimes we can expand our services, sometimes we do these tiny asset purchases to bring controls line with it, and all of sudden we created $3 million, $4 million, $5 million business out of nothing, that’s more of us.
That micro tuck-in I would call it. The likewise, we would also look for plat 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 on organically.
Now, 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 a place for major acquisition. And then as you go to Industrial, we 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 Redman. And then you think about things we can 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 they 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..
And the ones that you missed on this past year that you weren’t able to come to terms on, where any of those large acquisitions?.
All three of them would have been significant. They all would have had, they were in the hundreds of millions of dollar revenue wise, and 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. Good morning..
Good morning..
So I guess first question is, Tony in the past you’ve said that if you can grow revenue let’s say in the mid-single digits, 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.
You know, Industrial is getting a little more difficult to call 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 do you think about that?.
Well, I think we’re getting some leverage on the drop through side, right. If you grow revenues 8.3% organically and you grow operating profit 13.1%, you’ve got leverage. Now, did we get the margin expansion we would have liked to have gotten. The mix overwhelmed that this quarter, and maybe Mark can go into more detail.
But we lose just big numbers, when we lose shop, good shop work, it takes quite a bit of the other revenue to make up for it.
Mark?.
Yes. And I think, Tahira, 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 beneficiary of in the third 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..
Look, Tahira, it’s safe to say if we are replacing something that’s – as Mark just said twice the margin profile of EMCOR at least, with something that’s even, is still better than the margin profile of EMCOR that may have marked 400, 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 the quarter, and clearly it took some margin performance away from us, but again we are happy with the margin dollar growth..
Right. And I didn’t want, I mean, the improvements you’ve made on G&A out of restructuring you have done is very commendable, so I did want to convey that.
And 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, would we still struggle to get out of the low 4% sort of below 4.5% operating margin range as you look forward..
I don’t think we are struggled. I don’t think third quarter 4.1% is the high water mark for them or by any stretch of the imagination. I think if 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 will be sort of low for us, mid for us. I think corporate will sort of stay fairly level. And I think the headwind we have – and want to be a little cautious is, the shop work is really good work.
And if we can get enough repair work to overwhelm that, then we will get back on par, but if we can’t get enough repair work to start filling the gaps around that OEM mark, we’ll take out the cost, which we’re pretty good at that, we will have some headwind..
The only other thing I would add, 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, and the other phenomena we have is that the majority of the revenue growth that we are experiencing in that segment is coming from the RepconStrickland portion of the business.
So once again, higher margin profile than the most of the other EMCOR businesses, but a slightly a 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 the low of average and simple math..
Yes, and look, I know where you’re going with the question and it’s a good question, it’s the one 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-4s and trying to make our way to 5%. If we have this headwind in Industrial and in 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 three things. One, as we go to the end of year, our business is in really good shape.
Two, we have confidence in that business and it really shows by what our Board authorized has to do with our meeting yesterday. Go by the best company you have, which is you if we can’t make the right deals and that’s what this management is dedicated to, is building value for our shareholders.
And 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 got a great team down there in Beaumont that will do that. And we wish you all great Thanksgiving. And as you move into the holidays, have a great holiday.
And I guess we will see some of you out on the road, but for the most part I guess we’ll talk to you all on February. And we look to finish the year strong. Thank you all very much..
This concludes today’s call. You may now disconnect..