Bradley Vitou - FTI Consulting, Inc. Tony Guzzi - President & CEO Mark Pompa - EVP & CFO Kevin Matz - EVP of Shared Services.

Noelle Dilts - Stifel Adam Thalhimer - Thompson Davis Tate Sullivan - Sidoti & Company Tahira Afzal - KeyBanc Capital Markets Brent Thielman - D.A. Davidson.

Good morning. My name is Doris and I will be your conference operator today. At this time, I'd like to welcome everyone to the EMCOR Group Third Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator instructions] Mr.

Bradley Vitou with FTI Consulting, you may begin..

Thank you, Doris, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2017 third quarter results, which we reported this morning. I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead..

Thank you, Brad, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the third quarter of 2017. It's crazy to me how quickly this year has gone by.

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. We are currently on Slide 2. Slide 2 are the folks that are with me to discuss the quarter and nine-month results.

They are Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; Maxine Mauricio, our Senior Vice President and General Counsel; and our Vice President of Marketing and Communications, Mava Heffler.

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 Presentation. 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 statement. These forward-looking statements involved 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 our 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 2016 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?.

Okay. Thanks, Kevin. Look, we had a great quarter despite significant Industrial Services segment headwinds, which was primarily caused by Hurricane Harvey. So, I'm going to be on Pages 3 to 4 to start the discussion today.

We earned record quarterly earnings per share due to share from continuing operations of $1.09 on revenues of $1.89 billion and operating margins of 5.6%. We set quarterly records for operating income, net income and diluted EPS from continuing operations. We had great execution in our Mechanical and Electrical Construction segments.

We had strong execution in Building Services and the U.K., and we had a real tough quarter in our Industrial segment where our customers were hit hard by Hurricane Harvey. This quarter, much like our strong performance over the last two years, really highlights the operational strength and end market diversity of EMCOR's businesses.

We focus and we respond to our customers' needs and we bring strong technical expertise and project and program execution to their business needs, and we do that very well. This continued strong performance showcases our ability to move deftly between opportunities and markets.

In our Mechanical and Electrical Construction segments, we performed exceptionally. Our strong performance was pretty broad-based by end market and trade. We executed really well in both of these segments in commercial, transportation and industrial plus manufacturing.

We had extraordinary operating income margins in our Electrical Construction segment of 10.2% and in our Mechanical Construction segment of 7.6%. Yes, we have achieved substantial cost savings with the completion of several large complex projects.

But as important or more importantly, we've had outstanding overhead absorption over the past 12 months as we have grown revenues with very little fixed cost increases. Our competition is still very aggressive and our customers are as demanding as ever.

If you may recall, we believe that anywhere between 5.5% and 6.5% operating margins is very good Mechanical Construction performance and we also believe anywhere from 6.5% to 7.5% to 7.75% operating income margins is very good Electrical Construction performance.

As we have said many times, a trailing four to eight quarter average of our operating income margins is more indicative of our overall performance. It has the tough jobs, the resolution of the tough jobs, the really good jobs, the overhead absorption, contracts converted, etcetera, etcetera, all in those numbers.

We also had strong organic revenue growth in our mechanical segment overall of 9.9%. About 3/4 of that was organic in the third quarter. Building Services had a very good quarter, led by its continued strong execution in our mechanical services business and improved performance in our commercial site-based business.

Despite a decline in revenues, we had improved operating income margin improvement as operating income margin improved from 5.0% to 5.9%.

Again, these quarterly operating income margins are not likely sustainable over a long period of time, but we are very pleased that our operating income margins are 4.6% year-to-date and really that's an objective we've been shooting for, to be north of 4.5% or we want to be able to operate this segment above that.

And certainly, the improved mix helps drive this improvement as some lower margin commercial accounts move to their new rightful account holders, and they can go ahead and perform that work at very low margins. Harvey crushed our Industrial Services segment this quarter. As a result, we've had significant work changed and pushed out.

We still do not have a great clarity over the revised turnaround schedules for significantly changed fall and slightly changes to the spring 2018 schedule, and that will likely cause a short-term reduction in previously planned work as our customers bring their plants to full operational status.

We did respond very well for our customers through this disruptive event. Some of our customers who were hit especially hard, especially on the petrochemical side, and right now they're taking detailed engineering reviews underway to plan the work ahead and bring their plants fully online.

We do expect to earn some significant work from these plants as they recover, but to date, we cannot place a timeline or value on that work. This delay could cause significant work to be delayed anywhere from 6 to 9 months. In a lot of ways, it reminds us on what happened with refinery operator strike in the spring of 2015.

As that event created some real headwind for two to three quarters during and after the event. The work eventually came back with some increased scope but the reality is you cannot find the discrete work or events that you were going to execute.

Also, the storm led to under absorption of overhead, as we're prepped to execute the work coupled with the lost work days from the storm, and we still paid our full-time salary and hourly people despite limited opportunity to gain revenue during those time periods.

I do expect our industrial segment to turn positive operating income in the fourth quarter if workflows as currently planned. Our U.K. segment is a finally seeing the payoff from all their hard work of restructuring the company and winning new work and moving through the startup phase on that significant new work.

The Brexit foreign exchange impact is largely behind us, absent another significant dislocation, and we are realizing the benefits of our import -- improved focus and execution in the U.K. We can see the results, the impact of the successful multi-year effort to improve our business.

I want to acknowledge that success and we look forward to the continued success of our U.K. business. Our balance sheet remains liquid and strong and allows us to not only invest for growth but also to invest in acquisitions and share repurchases. Our backlog has grown from a year ago period by 1.5% and stands at $3.96 billion.

We had excellent cash flow in the quarter of $135.4 million. We also had an excellent quarter, where we overcame significant, and I just want to emphasize that, adversity in our Industrial Services segment. And with that, Mark, I'll turn it over to you..

Thank you, Tony, and good morning to everyone participating on the call this morning. For those accessing this presentation via the webcast, we're now on Slide 6.

Over the next several slides, I will augment Tony's opening commentary with the detailed discussion of our third quarter 2017 results as well as a summary of our year-to-date results through September 30.

All financial information reference is derived from our consolidated financial statements included in both the earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. So, let's revisit our third quarter performance. Consolidated revenues of $1.89 billion are down 1.9% over quarter 3 2016.

Our third quarter results include $34.7 million of revenues attributable to businesses acquired, pertaining to the period of time that such businesses were not owned by EMCOR in last year's third quarter. Acquisition revenues positively impacted our U.S. Mechanical Construction and U.S. Building Services segments.

Excluding the impact of businesses acquired, third quarter revenues declined organically $71.2 million or 3.7%. U.S. Electrical Construction third quarter revenues of $457.9 million were essentially flat with quarter 3 2016.

Quarter-over-quarter revenue gains within the institutional commercial and health care market sectors were offset by revenue declines within the industrial and transportation market sectors due to the completion or substantial completion of large projects active in both 2016's third quarter as well as the first 2 quarters of 2017. U.S.

Mechanical Construction third quarter revenues of $760.1 million increased $68.3 million or 9.9% from quarter 3 2016. Excluding acquisition revenues of $17.9 million, this segment grew organically 7.3% quarter-over-quarter.

This segment's revenue growth is primarily driven by higher project activity within the health care, hospitality and commercial market sectors, slightly offset by reduced industrial construction project activity.

EMCOR's total domestic construction business third quarter revenues of $1.2 billion increased to $67.6 million or 5.9%, with 4.3% of that growth being generated from organic activities. U.S. Building Services revenues of $437.1 million decreased $23.6 million or 5.1%.

Excluding acquisition revenues of $16.8 million, this segment's quarterly revenues decreased $40.4 million or 8.8% organically.

Revenue growth within the mechanical services division was offset by revenue declines within the commercial site-based and Government Services divisions due to maintenance contract attrition primarily occurring in 2016 as well as less indefinite duration, indefinite quantity project volumes from government-related activities. U.S.

Industrial Services revenues of $145.7 million decreased $93.4 million or 39% due to lower field services activities quarter-over-quarter as a result of Hurricane Harvey's impact to our customers' facilities in the Texas Louisiana Gulf Coast region.

Due to the severity of the storm and its prolonged impact, previously scheduled maintenance turnaround work has been delayed or deferred. Additionally, 2016's third quarter revenues were favorably impacted by the execution of a large specialty services capital project that was completed in 2016.

United Kingdom Building Services revenues of $85.9 million increased $12.9 million or 17.6% as a result of new service contract awards that commenced after July 1 of this year. These new contract awards were successful in offsetting the continued weakness in United Kingdom's small project and capital project activity.

Foreign exchange headwinds were minimal on the quarter-over-quarter comparison and did not substantially impact our current quarter results. Please turn to Slide 7. Selling, general and administrative expenses of $188.6 million represent 10% of third quarter revenues and an increase of $7.1 million from $181.4 million reported in 2016's third quarter.

The current year's quarter includes approximately $3.8 million of incremental SG&A inclusive of intangible asset amortization from those businesses acquired, resulting in an organic quarter-over-quarter increase of approximately $3.3 million. This increase is due to unfavorable bad debt experience as well as increased medical costs.

The increase in SG&A as a percentage of revenues is due to the factors just referenced as well as unabsorbed overhead cost within our Industrial Services segment due to the unfavorable impact of Hurricane Harvey and the resulting lost workdays within the Texas Louisiana Gulf Coast region.

Reported operating income for the quarter of $106.5 million represents 5.6% of revenues and compares to $86.1 million and 4.5% of revenues in 2016's third quarter. All operating segments are reporting quarter-over-quarter improvements in operating income other than our Industrial Services operations. Our U.S.

Electrical Construction services operating income of $46.6 million increased $15.7 million from the comparable 2016 period. Reported quarterly operating margin is 10.2%, which represents a substantial improvement from 2016's third quarter.

The increase in both operating income and operating margin is due to continued improved contract performance within the transportation and commercial market sectors as well as quarter-over-quarter improvement in institutional market sector project activities.

Additionally, this segment experienced a $6.9 million loss in last year's third quarter on a construction project located in the Northeast region which was completed in 2016. 2017's third quarter U.S. Mechanical Construction services segment operating income of $57.5 million represents an $18.6 million increase from last year's quarter.

This represents 47 -- represents a 47.8% improvement quarter-over-quarter due to improved operating performance across all market sectors served with projects within the institutional and water sectors contributing the largest quarter-over-quarter increases. Our total U.S.

construction business is reporting an 8.5% operating margin for the quarter just ended as compared to 6.1% in last year's third quarter. Operating income for U.S. Building Services increased $2.9 million to $26 million or 5.9% of revenues. Acquisitions generated $1.2 million of the period-over-period increase.

In addition, both our commercial site-based services and energy services divisions had improved performance quarter-over-quarter. Our U.S. Industrial Services segment operating loss of $4.8 million compares to operating income of $14.6 million in 2016's third quarter.

The weak performance in the quarter is attributable to lower turnaround activities as highlighted earlier in both Tony and my commentaries due to the impact of Hurricane Harvey.

Additionally, as disclosed throughout 2016, last year's third quarter reflected the income contribution of a large field services capital project that was completed within that year. U.K.

Building Services operating income of $3.9 million represents 4.6% of revenues, which is an increase of approximately $1.3 million and is a 110-basis point improvement over last year's third quarter. With minimal foreign exchange headwinds in the quarter, it's nice to see the successes of our U.K. team directly in our quarterly operating results.

Lastly on this slide, and as Tony mentioned earlier, we had a strong operating cash flow quarter with cash provided by operations of $135.4 million which compares favorably to the $81.1 million generated in 2016's third quarter. We are now on Slide 8.

Additional key financial data for the third quarter not addressed on the previous slides are as follows; quarter three gross profit of $295.1 million or 15.6% of revenues is improved from the comparable 2016 quarter by $27 million and represents 170 basis point improvement over the 13.9% gross margin in 2016's third quarter.

This quarter-over-quarter improvement was accomplished despite a less-than-favorable mix of revenues due to the reduced contribution from our Industrial Services operations. Diluted earnings per common share from continuing operations is $1.09 and compares to $0.85 for the quarter ended September 30, 2016.

This represents a $0.24 or 28.2% improvement quarter-over-quarter. Lastly, and as Tony started today's presentation, our third quarter results represent new records for gross profit, operating income, net income from continuing operations and diluted earnings per share from continuing operations for any quarterly reporting period.

In addition, our gross profit margin and our operating income margins set a new company record for a third quarter. We are now on Slide 9. With the quarter discussion behind us, I will now speak to our year-to-date results through September 30.

Revenues of $5.67 billion represent an increase of $72.8 million or 1.3% as compared to $5.6 billion in the prior year period. Our year-to-date results include $156.5 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in the 2016 year-to-date period.

Excluding the impact of businesses acquired, year-to-date revenues decreased organically $83.6 million or 1.5%. Significant revenue growth within each of our U.S. construction segments was muted by the year-to-date revenue declines within our Industrial Services and U.S. and U.K. Building Services segments.

Year-to-date gross profit of $835.9 million is greater than the representative 2016 period by $70 million or 9.1%. 2017's gross margin of 14.7% represents a 100-basis point improvement over 2016, primarily due to improved project execution year-over-year within our U.S. electrical and U.S.

Mechanical Construction segments as well as a more profitable revenue mix within our U.S. Building Services segment. 2017's gross profit and gross margin also benefited from the recovery of $18.1 million of previously disputed contract costs within our U.S. Mechanical Construction segment during the second quarter.

Selling, general and administrative expenses of $552.9 million represent 9.7% of revenues as compared to $530.7 million or 9.5% of revenues in 2016. Year-to-date, 2017 includes $20 million of incremental SG&A inclusive of intangible asset amortization pertaining to businesses acquired.

The year-over-year increase in SG&A as a percentage of revenues is due to unabsorbed overhead within our U.S. Industrial Services segment due to lost workdays as a result of Hurricane Harvey. Additionally, increases in year-over-year medical costs and bad debt expense also contributed to the higher SG&A as a percentage of revenues.

Year-to-date operating income is $282.1 million and represents a $48.1 million increase over 2016's year-to-date performance. Our year-to-date operating margin is 5% as compared to 4.2% in 2016's nine-month period.

2016's operating margin on an adjusted basis, reflecting those items we believe impact year-over-year comparability, is consistent at 4.2%. Our year-over-year improvement in operating margin is 80 basis points and is due to the improved project execution within both our U.S. electrical and U.S.

Mechanical Construction segments as well as the year-over-year increases in our U.S. Building Services segment. Reported diluted earnings per common share from continuing operations is $2.93 for the 9 months ended September 30, 2017, compared to $2.33 in the corresponding nine-month 2016 period.

On an adjusted basis, reflecting the add-back of transaction expenses related to the Ardent, Rabalais acquisition in April of 2016, diluted earnings per common share from continuing operations would've been $2.37 for 2016 as compared to 2017's $2.93, which represents an improvement of 23.6% year-over-year.

We are now on Slide 10 and hopefully in the home stretch. EMCOR's balance sheet continues to maintain its strength. The values of the note from December 31, 2016, are as follows.

Our September 30 cash balance has increased slightly since year-end due to our strong nine-month operating cash flow performance offset by funds expended for common stock repurchases, acquisitions, capital expenditures and dividends.

Working capital has increased due to the increase in cash just referenced as well as a moderate increase in accounts receivable slightly offset by an increase in our net billings and excess of cost on uncompleted contracts.

Changes in our goodwill and identifiable intangible asset balances reflect the impact of acquisitions made during the year as well as the finalization of the purchase price allocation for our prior year acquisition net of $36.3 million of intangible asset amortization expense in the 9-month just ended.

Total debt of $413.9 million is reduced from year-end 2016 due to the mandatory quarterly principal repayment under our term loan of approximately $3.8 million, of which $11.4 million has been paid year-to-date, offset by new capital lease additions during the first 9 months of the current year.

As a result of our outstanding borrowings, we currently have a debt-to-capitalization ratio of 20.4% which represents a slight decrease from year-end 2016. We have had excellent cash flow conversion during the first 9 months of this year, and as a result, our balance sheet continues to reflect our strength.

We will continue to maintain our strong risk assessment discipline and remain in a great position to capitalize on market opportunities. With my portion of the presentation finally concluded, I will now return the call to Tony.

Tony?.

Thanks, Mark.

Third quarter is always tough, isn't it?.

Yes it is..

Got to go through. Look, I'm on Page 11 and 12 and I'm going to talk a little bit about backlog. There's not really a lot of new news in here. Total backlog at the end of the third quarter is $3.96 billion. It's up $60 million or 1.5% from both September 2016 or end of third quarter of '16 and from year-end.

Similar to last quarter, our markets continue to give us quality bidding opportunities across most sectors. And look, the numbers show our construction segments are executing very well. When we focus on the market sectors, the commercial market continues to be strong for us as the backlog at the end of the quarter is over $1.5 billion.

It's up 22% from September 2016. Demand is fairly widespread and we are experiencing strength across both from our construction segments as well as our mechanical services business and Building Services. What we're seeing pretty much dovetails with what most industry publications say.

We believe commercial construction will remain fairly good for the foreseeable future.

Backlog in the institutional health care and hospitality sectors is also up year-over-year and year-to-date while backlog in transportation and the industrial sectors from industrial/manufacturing is down as we work down some large projects, mainly in food processing and transportation infrastructure.

So now we'll talk a little bit about backlog by segment. Backlog in our domestic construction segment has remained pretty steady at around $3 billion in 2017 and that's even with double-digit year-to-date revenue growth generated for the first 9 months. And then look, 8.4% of that growth is organic.

There continues to be demand for our Construction Services. We remain selective in our bidding pursuits. The segments are currently executing and converting at a very high level from both a profit and cash generation perspective. Building Services backlog at -- remained level at $700 million and it's up about 6% from year-end.

It's anchored by strength in our mechanical services business and we do have some nice site-based opportunities that I've talked about that are in the pilot stages right now and not fully reflected in backlog. Our Industrial Services backlog stands at $57 million. Not much has really changed. Few more inquiries but pricing remains soft. And U.K.

backlog is up a bit, reflecting to see some new contract award wins. So, I'm cautiously optimistic, as I can be, with regard to the non-res market. I'm not a real forecaster. We'll let Kevin talk to you about that. But with the U.S.

economy improving, a low interest rate environment, maybe someday tax reform, some access to capital, private construction activity should remain relatively strong, hopefully into 2018. What that really means, we expect the 3% to 5% non-res market to be able to operate in, in 2018, 3% to 5% growth.

So, let's get to the exciting part, Pages 13 and 14, right? We are raising our earnings per diluted share from continuing operations from $3.40 to $3.60 to $3.70 to $3.80. We do expect revenues to still be around $7.6 billion, and so the reality is we continue to believe we'll have strong margin performance through year-end.

So, what do we need to do to continue this strong trajectory really through the balance of the year and going into 2018? First let's be clear. Fourth quarter may not from an earnings per diluted share be stronger than third quarter but it's still going to be a pretty good quarter, and we do expect excellent execution across most of our business.

So, the first thing we have to do is overcome the significant headwind from hurricane Harvey in our Industrial Services segment.

We're going to have to leverage our cost structure and look for every opportunity to help our customers with their short-term maintenance needs to improve their current operations and also help them as they do their detailed engineering views so that we're present for the longer-term opportunities because look, the storm assaulted our customers' infrastructures in a pretty significant way.

Our Building Services segment and U.K. segment will continue to have strong execution in the fourth quarter, much in the same manner as their year-to-date results.

We really do expect good performance, but in both cases, Q4 should be good, but in a lot of cases, it could be a little weaker than third quarter as especially in our Building Services segment, third quarter is one of our seasonally strongest quarters.

Our electrical Mechanical Construction segments we do expect continue the same pattern of success and execution in the fourth quarter that we have experience in our year-to-date performance. We expect the strong finish to our record year in our year-to-date performance in 2017.

We do expect excellent cash flow to continue and we will continue to look to actively support not only the organic growth in our business and the project opportunities and program opportunities that we see, and we have successfully exploited, and we will continue to successfully exploit across our business but we are actively pursuing acquisitions across all of our U.S.

segments. We will balance those needs against share repurchases. Confidence in cash performance in our business outlook is bolstered by yesterday's board action to increase our share purchase repurchase authorization by another $100 million. Thank you. And with that, Doris, I'll take questions..

[Operator instructions] Our first question is from the line of Noelle Dilts with Stifel..

Good morning, Noelle..

Hi. Thanks. Good morning. So, I know you spent a lot of time on -- you guys spent a lot of time talking about the industrial segment on the call. But it sounds like there's a lot of uncertainty as you look out to 2018.

But could you just give us, I guess, a little bit more detail on your -- some of the -- what you can see on the positive side as we get into the first -- the spring turnaround season. How you're kind of thinking about the -- what could come through in terms of upside and downside? You mentioned that there was some potential for cancellations.

So, can you give us some thoughts on when you might have some clarity there? And then how you are thinking about the fall turnaround season at this point I know we're getting pretty far out there..

Yes, Noelle, this was a fairly significant dislocation. We have lined up, we thought, a pretty decent fall to 2017 turnaround season. And I think what we said is it looked a lot like what was a pretty strong fall 2016 season. So, what we experienced, first, right, a lot of that work starts in September.

Well, clearly, a lot of that work happened as a result of September because most of that region was under water. Couple that with plants deciding whether they're just going to get in, fix them up to keep operating again, and most plants are up and operating again especially on the refinery side and not so much on the petrochemical side.

And now they're determining how big the scope of work will be because I remember a lot of these folks lost production. Track spreads are pretty good. So, the balancing do I do increase scope right now or I just get back online and think about doing this work sometimes out in 2018 and even maybe into 2019.

It really does remind us -- different event and it does depend on each facility is unique -- but remind us a lot of the refinery operator strike. If you remember, we got hit pretty hard with the refinery operator strike and some people didn't, and we did because it was our customers, in some cases, that we're experiencing the strike.

What we saw happen there is what happens is you lose the discrete nature of the work you were going to do. It morphs into another event. We're likely to be the contractor that does that event. And that event in the short term may have a reduced scope, but in the longer term, it tends to have an enhanced scope.

And we saw that if you look at our performance in the back half of '15 going into '16, even absent the large project that we did, we were pretty robust through the first and second quarters of '16, and remember that's a year later, when that manifested itself.

Unfortunately, I think, that could be a very similar dynamic this time and I'll ask my colleagues to kick in on that. We think it's a very similar dynamic, that the spring looked pretty good as of August when we sat down and we do a very detailed review of the fall and the spring. We tried to keep 6 months ahead at least.

We had talk of we were going to have difficulty staffing all the projects potentially in the region, not us but regionally.

And now the difficulty for a different reason, right? And I think any upside becomes -- in early 2018 is going to be the result of what is now an unplanned event, where people say let's get this going now, we see an opening to do this, where the plan had to come down opening. On the petrochemical side, it's very different.

We have people that are undergoing very detailed engineering reviews, we have some plants that are our customers, that are being -- that were hurt very badly and the plants aren't even running. Mark, I'll kick it over to you to give your color and Kevin, if you have any.

But what we saw there is we expect that work will be a much more planned out because they're trying to get it right because the demand isn't as strong as it is for -- as it's crack spreads are in the refined product..

Noelle, this is Mark. The only thing that I would add to Tony's commentary and not to be duplicative is it is extremely fluid right now, as you would imagine.

And clearly, we're available and capable to help our customer base and anybody else who is in need of our services, but I don't think our visibility is going to improve all that greatly until we actually kick over until the first of the year.

And early at that point, I think we're going to be in a better position to assess what positive impact it's going to have on 2018 above and beyond what was already on the schedule for planned work..

And see what else happens, right, and when you're working in a nonunion environment versus a union environment, and we do both, is in a nonunion environment, in this specific business, you have -- especially your supervisory people down through the former level as you get ready for the season and you're guaranteeing them a certain number of hours.

They've forgone other opportunities, and we honor that. And so, one of the things you saw in our numbers was really some pretty significant absorption seen in our SG&A. If you look at our SG&A year-to-date really, absent that, it’s terrific absorption within our fixed overhead.

And the only thing would be up is a little bit of incentive comp year-over-year and not even that because of the correction in industrial. You're really just seeing the impact of the acquisition which with our growth we've had over the last few years and is something we thought would happen, it's actually happening better that if we thought it would.

We've added more volume without adding a lot of fixed infrastructure. That's something you can't really tease out of the numbers but in fact is there..

Okay. That's actually -- that's really helpful. After that color, just for my second question, I wanted to shift over to non-res. I was encouraged to hear you guys are expecting a 3% to 5% type of growth environment.

We've, obviously, seen some mixed signals in terms of some of the leading indicators that we're watching in terms of a little bit of softening on some of the key commercial verticals.

As we think out to next year, is there any real shift in terms of where you think that growth is coming from? Are you expecting a little bit of an uptick in some of the institutional building? Or is that really just continued strength on the private side?.

Yes. So, we think of nonres, we're thinking about how it impacts us. We don't see any big shifts and look, we're going to book some significant work probably. We don't know when that is going to be.

And so, we've always said backlog could be a soft sawtooth pattern especially with the strong revenue growth in our Electrical and Mechanical segments, but we have pretty robust bidding opportunities yet.

I think part of it is where we are in the cycle and part of it is what our capabilities are in some markets that are particularly strong, especially in the private side. And we're doing more faster work that we've done. Typically, we burn a large project faster than we typically would do through 2017. We think that will continue to '18.

So, backlog book-to-bill might not be everything reflective of what's going on in our business, on the construction side over a year period. Over a year period, I think you get it in the growth rates, but we see a pretty good market going into '18 both for larger opportunities to smaller. But again, every decision is binary.

We think we're well positioned for some of this work. We think the competitive dynamics are still there. We've learned recently if we tried to push the margin on the bidding opportunity a little too strong, we may lose that work. Our competition is willing to take advantage of that opportunity.

And so, it's more of a science than an art, and then once we get to work, which really been happening in our story is really, really good execution. And really, that execution was, and I said this, was underlying the business in '16. Unfortunately, it got overshadowed by a couple of really tough jobs..

Great. Okay. Perfect. That's really helpful. Thanks..

Our next question is from the line of Adam Thalhimer with Thompson Davis..

Good morning, Adam..

Hey. Good morning, guys. Congrats on a great quarter..

Thank you..

Can you give us an update on -- there were some jobs you mentioned last quarter in the Building Services groups and potential awards? Can you give us an update on those?.

Sure. We're executing on both of them now. They could be significant opportunities. We think they will be. It could be a multi-year implementation to full implementation. The only part that's in backlog right, Mark, would be the pilot phase there..

So, Adam, not to interrupt Tony, but 1 of the 2 was in a pilot phase. And assuming that we are successful when they go forward with their plans, we're going to be launching across other regions of the country over the next couple of years. And the other project is in the startup phase right now and I hope to be fully ramped up as we move into 2018..

Yes. The one opportunity is a total shift for that customer and how they approached a large number of facilities across multiple regions. They're thinking 10, 20 years about how this turns out. So that doesn't make any difference. We want to implement as fast as we can, and that's the balance.

And we're now in negotiations to make sure that we get more protection as we invest SG&A on the slower ramp. To them, it doesn't matter whether it's 3 years or 18 months. For us, it matters a lot whether it's 3 years or 18 months..

Great.

And then Tony, what are you seeing in the M&A landscape right now?.

We've had two decent deals close already this year. They have augmented nice capabilities that we already have it, helped build out our fire protection business even more and it gave us a really great mechanical services business in the Rocky Mountain region. We expect to close a similar sized deal by year-end. It'll be in one of the U.S. segments.

We think that'll happen. We'll see, I mean it happens when they happen. And we have some nice opportunities we're looking at. But again, just like projects, every deal is binary. Sometimes we're successful. Sometimes we're not or sometimes it takes a multi-year effort for us to do that.

We're going to remain disciplined and we're going to balance that opportunity versus organic growth which is always first.

And then comes acquisitions and then comes share repurchases, and share repurchases happen because we feel that sometimes is the best company you can buy -- well we're always the best company to buy is ours but we can also augment, make our company better through the right acquisitions..

And then lastly, the Ardent business, I know they have some exposure to pipeline construction and there's been some nice movement there with the -- can you give us an update?.

Yes. So, we expect that to impact us sometime middle of next year. We thought it will be middle of this year. All that has been pushed out about a year. Remember we're further down the food chain. So, the engineering has to happen. The general pipeline contractor gets the award and then eventually we get the award. But yes, we see the same thing..

And that's the electrical segment?.

That would be in the electrical segment, yes..

Adds a couple -- that could add a couple of points of growth there..

Not the size the electrical segment is right now..

Okay. Great. Thanks. Congrats again..

Thank you..

Our next question is from the line of Tate Sullivan with Sidoti..

Hi. Good morning. Thank you.

Can we talk about electrical contracting margins a little bit? I mean 10.2% was amazing, when you said earlier in the call that -- I mean these margin levels aren't unsustainable over the long term but I mean, are you implying that you can maintain 10% here in the near term?.

No. I don't think I said that. I think that what....

But you said not in the long term but I'm just starting to see what you might expect. I mean....

I think what I've always said is a quarterly view on margins, good or bad, is not necessarily the best way to look at our business. And if you look back over 4 quarters, in our electrical business today, the trailing 12 months, and it has some noise in it.

This is about 7.7% and over the trailing 24 months, the 6.6%, clearly, we're trending to the higher end of that here in the near term and could be a little bit above that, but no, 10.2% could be a good quarterly print. Maybe in some extraordinary year, we could do that. But it wouldn't be certainly anything we would ever plan our business around..

Right, okay. And then, I mean, within the Q, you talked about some tied telecom projects and the large transportation projects.

Are the telecom projects what you've referred to before is mostly data centers?.

Data centers are an element of it. We're doing some other work around that too..

What's an example of another type of telecom project?.

Well, we do some remote stations, we do some substations supporting the telecom industry and other things like that..

Okay.

And was the transportation project something that may be finished this quarter and contributed to that 10% margin?.

A couple of transportation projects had major milestones but they are not complete but by -- we've able to release some contingency at that major milestones. But really this was clearly a case of a lot of things going right and a lot of small things going right. There's really nothing outsize happening here that -- and part of the normal business..

Okay.

I'm just -- can you remind me what happened, my last one is last year in the fourth quarter, when you had a project loss? So, these kind of project losses, I mean was that unique to last year when you had a lot of quick orders within the quarters for petrochemical facilities? Or what is the difference this year compared to last year?.

I'm sorry. This is Mark. I got to interrupt Tony for a second. So just looking at 2016 from a complete year perspective, we did have several projects that actually had project losses that -- some of which were transportation-related, which was impacting our electrical segment through the first three quarters of last year.

And then specifically, in the fourth quarter -- so those projects were long-term duration projects that had been in progress pre-2016.

The event that happened in the fourth quarter was a discrete project that was a quick turnaround project where all the work was executed within the confines of quarter four, and that was the project we were successful with recovery with regards to the second quarter of the current year..

You were? Oh wow. Okay..

Yes. In my prepared commentary, I did call out in our Mechanical Construction segment that we benefited from $18 million of cost recovery in quarter two of 2017, which is impacting our year-to-date results for September, obviously. That was specifically related to that project that what was written down in quarter 4 of last year..

It would be unusual for us on that kind of project to have the kind of situation that develop for us in the fourth quarter of last year. First, the contract structure is a timing material type contract structure. It was a very unique situation around labor that we talked extensively about it in our year-end call last year..

If I may, you said you have a site-based project not in backlog.

What are those? And what are the examples of those?.

No. What I said is we had two that I've talked about it in our second quarter call that could be significant opportunities and right now they're in their pilot stages. And the only part that is in backlog is a very small number that we pilot.

And just to remind everybody for backlog on those type of contracts for us, at EMCOR, as of today, we only include one year of the fixed contract amount. We make no guesses on the other work and we don't take the full duration of contract.

And, then we have those contracts, if they haven't been renewed yet as we get into the final year of the contract, all we leave in those in backlog is what's remaining on the contract..

Okay. Thank you. Have a good rest of the day..

Our next question is from the line of Tahira Afzal with KeyBanc Capital Markets..

Good morning, Tahira..

Good morning. Tony congrats. Fantastic quarter obviously. Many congrats to your team. I guess, Tony, first question. So, I look at your implied guidance, it really suggests you will end the year at the upper end, let's say of your guidance with operating margins of 5% or so.

What do you need to do next year? What do we need to see in the market happen next year? Do we really see those types of operating margins on top of those?.

Well, to start out, we need to continue to have a market that we can operate in, right? So non-res is growing. It gives us a market that we can operate in, then we should be okay as far as having an environment that we can operate in.

The second thing is, which is actually the good news story is this year that we have these margins, despite the fact which is usually our most profitable segment industrial really crushed by what's going on here in the third and fourth quarter with Harvey. The next thing that has to happen is look, if you noticed we're in a tough business.

Things happen and we get our projects sometimes through -- I usually say usually not through our own fault. I mean that's proven out as we prosecute things over time, but we're not a big claims contractor, it's not something to say I wish we have.

But this year, we are absolutely operating in a stellar manner and we're operating on jobs that our customers and the general contractor, the contractors are more worried about getting the job done, they're all working together to get those jobs done.

It's lined up with a lot of our highly skilled operations getting more work than others maybe this year. And we've really had a significant absence of badness, right? I mean we always have something going on but there's really been nothing significant this year. And with luck, we would hope to keep that up.

So, all those conditions will allow this to happen. Going into next year, and we don't give guidance at this point obviously, but margins are the biggest leverage point, and obviously, we'd love to keep these margins but we got our work cut out for us doing that.

I guess, before I finish, I would point out what Mark said in his commentary, don't lose sight of the $18 million settlement we had in second quarter and the impact that can have on us..

I hear you. And Tony, second point is, Valero, as you know, they're a big refiner. That is a same factor for you, as you said, earlier on but they're positive on how 2018 is shaping up also in terms of some of the growth opportunities that have been kind of missing entitles, probably the most confident commentary that's given in a while.

Any thoughts around how much -- as we look at how to allocate all that cash you're building out? How thoughtful you're going to be around some of the commentary coming from customers on the downstream side?.

First of all, they're a great operator and we're privileged to be able to work with them at times. Sometimes though, let's talk about the dynamics, what could happen in '18 in the industry. Crack spreads are likely to stay up a little bit. There are a lot of positives going on for them.

Pretty much this fall turnaround season is like a mosh pit right now, people trying to figure out what they're going to do. Everybody lost some operating days or a lot of people did. In those plants that are really the core of their function.

And the question I've start -- I've learned to acclimate myself to sometimes the more bullish our customers are, the more they're saying is we're really going to run these plants hard in 2018. And as a result of that, we may do less turnaround activity and less maintenance.

I don't know that sitting here today, but I've known that commentary in the past. That and what it does is it leads to a lag in the end of '18 and '19 where the maintenance could come back. And I think they're all trying to figure that out right now.

And then if you expand that to the petrochemical side, some of those plants got especially hit hard and that could turn into the unplanned work and the buffer that we need to take advantage of if the refinery maintenance work comes down and scope or gets pushed out. We're still very bullish downstream.

We believe that we still have product lines and consolidation opportunities that we'd like to take advantage of to better serve our customers. We certainly don't do a lot of rotating equipment maintenance right now. We'd like to figure out how to do more of that. We don't do a lot of catalyst work right now.

We'd like to figure out how to do more of that. And quite frankly, we don't do a lot of work where we need people in the plants that has to be a little bit lower margin but it gives you a sustained presence. Sometimes it's a little lower skilled.

And opportunities to do some of that might be good to allow us to continue to build our relationship with our customers, and there's all kinds of niche products we can grow out like refractory and everything else. So, we're bullish on it but I would say we're as bullish on the other parts of our business.

The two acquisitions we've done this year are examples of things we like to do. And whether it'd be electrical, mechanical, fire protection, industrial, maintenance and construction, just in the general market, mechanical service, maybe a new kind of technician-based service that we look at all the time, things add or, of course, downstream.

To any one of those to your places we would allocate capital..

Thanks a lot Tony..

And our last question is from the line of Brent Thielman with D. A. Davidson..

Good morning, Brent..

Hey. Good morning. Great quarter..

Thank you..

Tony, one more on industrial. Thanks for all the commentary on the turnaround aspect.

I was curious, I know you have less visibility here, but do you think all this mess could open up more work for your specialty, your field services business?.

Yes. I just don't know when..

Okay. Okay. And it seems everything outside of industrial is pretty sheltered from some of the activity -- hurricane activity this quarter.

Are you seeing any rest in construction or Building Services businesses in those regions?.

We think it was pretty much a wash. And I'll tell you if you go to the commercial side down in Houston we are a very successful mechanical contractor there, the market leader. They talked to it yes, we're helping people get their HVAC system back up and running. We're fixing our control systems.

We're fixing some of their piping systems, their underground systems especially, but the counter to that is some longer-term projects we're getting to ready to get underway are going through another look at the design to say, okay, how would we fare in a flooding situation like Harvey.

A great example is the Texas Medical Center, what they did after tropical storm Allison, where they put basically submarine doors to close in their facility and really, they fared very, very well in the storm.

So, we have a lot of customers, not that they'll probably affect most what we do other than move the mechanical rooms up a floor or two which has its own set of issues around when we do that.

But it's going to be a lot of, I would say, hardening looks at new facilities, the significant new facilities that are probably going launch fourth quarter, first quarter they'll probably going to be pushed out further, as now we get the engineers back in and say okay, if this happens again, how would we look..

Okay. That's helpful. And I know this large project activity can have a nice impact on electrical margin. I appreciate the color there so far.

I guess those areas where you're seeing the pickup in backlog commercial, health care, hospitality, institutional, can those bring the same size and scale of projects to electrical that I don't know, other areas like telecom, transportation can?.

Sure, its very project specific, probably one of the most successful pieces of work we've ever done for electrical was in the transportation sector. One of them may be underway right now and one of them happened about 10 years ago, 12 years ago. And of course, all the hospitality we worked in Las Vegas on the electrical side was very successful..

Okay. And are you seeing that type of work come to the….

On transportation potentially, yes. On hospitality, no..

Not of that size..

Not of that size but decent work..

Sure. And maybe one more on the M&A front. Look, Nonres market has some good tailwinds. Clearly, some more growth opportunity come, I'm sure there will be some people speculating it, it could be getting a little extended.

Do you see a busier pipeline today? And could you attribute any of that to some folks simply saying we're going to try and sell while it's hot?.

Well, I think it's less than; while it's hot, to a more that we can actually sell. They now have two or three, four years of successful operations. Most of them didn't experience that again until 2012, '13 when some of them got back to operating fairly well.

A lot of them are four years older or five years older than they were when this expansion really started. And the kind of folks we buy, that you're describing is part of long-term estate planning, and most of them still want to work and we're a logical buyer on the way out and they really care a lot about what happens to their people..

Okay. Thanks guys. Congrats again..

Thank you..

And that's all the questions we have in the queue. I'd like to hand the call back over to management for any closing remarks..

Okay. Thanks a lot. It was a great quarter. We look to finish the year strong and we'll be back and we'll talk to some of you I guess, probably out on the road a little bit. Yes, on a road a little bit. And other than that, thank you all for your interest in EMCOR, and great effort from our folks in the field..

Ladies and gentlemen, this does conclude our today's conference call. You may now disconnect..