EMCOR Group Inc. (NYSE:EME) Q4 2016 Earnings Conference Call February 23, 2017 10:30 AM ET
Kevin Matz - Executive Vice President of Shared Services
Tony Guzzi - President and Chief Executive Officer
Mark Pompa - Executive Vice President and Chief Financial Officer
Tahira Afzal - KeyBanc
Brent Thielman - D.A. Davidson
Noelle Dilts - Stifel
Adam Thalhimer - Thompson Davis
John D'Angelo - Macquarie
Tate Sullivan - Sidoti
Steven Ramsey - Thompson Research
Good morning. My name is Sylvia and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Fourth Quarter and Full Year 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will a question-and-answer session. [Operator Instructions]
Thank you. Mr. Bradley [ph] with FTI Consulting, you may begin.
Unidentified Company Representative
Thank you, Sylvia, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the Company’s 2016 fourth quarter and full year results, which were reported this morning.
I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce the management. Kevin, please go ahead.
Thank you, Brad, and good morning, everyone. Welcome to EMCOR Group’s earnings conference call for the fourth quarter of 2016. For those of you who are accessing the call via the Internet on our website, also welcome and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today.
We are on slide 2. Slide 2 depicts the executives who 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 & 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 presentations. You can find us at EMCORgroup.com.
Before we begin, I want to remind you that this discussion may contain certain forward-looking statements. Any such statements are based upon information available to EMCOR 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, and I guess, in two weeks we’ll have a change 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 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?
Yeah. Thanks Kevin. Good morning and thanks for joining us this morning. I’ll be speaking to pages three through five. I’m going to speak about 2016 and I’m going to leave it to Mark to cover the quarter and year in detail.
My comments - we use pro forma results that add back the Ardent-Rabalais transaction cost and the small impairment loss reported this fourth quarter. Taking a step back , we had a record setting 2016 at EMCOR. And I now would share some of the highlights overall for the year and then I’ll provide some highlights by reportable segment.
We had record setting revenues of 7.55 billion and earned $3.09 per diluted share from continuing operations. Cash flow from operations were strong at $265 million. Our revenue growth was exceptional in 2016, driven primarily by strong organic growth in our Electrical, Mechanical and Industrial Services segments. Overall, we grew revenues by 12.4%, with almost 70% of that being organic growth.
Our Electrical and Mechanical segments grew revenues 18.6% overall and had over 13.1% organic growth. Our Industrial Services segment had 15.8% revenue growth, all of which was organic. Building Services had 3% revenue growth, most of which were very good tuck in acquisitions in Mechanical Services and the UK had negative growth, driven primarily by FX post Brexit.
We had decent pro forma operating income margins at almost 4.2%. Overall, we had a lot more go right at EMCORe in 2016 than go wrong. We did well this past year, but we should have done better. As many of you know, we don’t spend a lot of time making excuses. And when bad things happen, we fight hard for our rightful entitlements, when we issues because as a specialty contractor we have already spent the cash. And we work to complete the work regardless of how difficult the conditions our customers have us work under or how demanding they are. That is what makes us who we are.
In 2016 however, we had three significant issues that totaled about $47 million of losses. Mark is going to cover in detail the financial impacts of these projects and contractors, but I wanted to provide a broader operational view of what impacted us on each of these projects in contrast. One of these projects was almost completely a fourth quarter event from an execution and completion perspective in our Mechanical Construction segment.
This was a time and material contract performed with a large crew of pipe fitters working very heavy overtime on a compressed time schedule, on a fast paced process facility project. These sets of circumstance are usually in our - success. However, in this case our customer expanded our scope and mismanaged this high intensity event and the customer significantly overran the budget on this work. That overrun for us totals almost $18 million, now that the work is complete, they do not won’t to pay us or write for entitlement.
The second project contract issue resulted in 9.6 million of product write downs on an institutional project due to unfavorable site conditions and project delays not driven by us. And finally, our issues on the large northeast transportation project have been communicated throughout the year and we are at reserve of a highly accelerated project in its final stages and it cost 19.4 million in 2016. All three of these projects are substantially complete and we are demobilized and working small punch list items.
To place this in context, this year we executed many large complex projects like these projects in contrast that went extraordinarily well. And we don’t spend much time discussing these success and its clear, the underlying strength of our results that despite these discreet negative issues, we could still deliver a record year for our shareholders. And now with those details of those projects behind us, I want to talk about the strength of our underlying business and I’m going to give you some highlights by segment.
In the Electrical Construction segment, the underlying business is very strong. As we build backlog through the year despite significant organic revenue growth, we executed well across our portfolio on some demanding projects across commercial, data centers, transportation, manufacturing and healthcare and institutional work.
In the Mechanical Construction segment, we had exceptional revenue growth and strong execution across almost all of our contracts and projects. We deliver well across the majority of our end markets with particularly strong execution in commercial, hospitality, manufacturing, data center and water and waste water end market sectors. We had executed well across all of our mechanical trays and have delivered strong results across all of our geographies.
We have and are executing some of the largest food processing work that we’ve ever done. We expect our growth and we should expect our growth in Mechanical Construction to generate growth in operating income. And outside the issue mentioned above earlier, we had strong correlation between revenue growth and operating income growth.
In our Building Services segment, we had a very good year led by very strong execution and performance in our Mechanical Services business. Our Mechanical Services business had strong performance not only in its Service agreement and repair Service activities, but also had very good overall performance in our retrofit projects. We continue to see strong demand for retrofit projects and EMCOR is able to package these projects and in many cases deliver strong energy savings to our customers.
We held steady in our commercial government site-based Services business and in these businesses, we continue to work to explore our niche in self-performed technical Services leveraging a nationwide footprint and we provide vendor managed solutions for interior and exterior Services. Overall, Building Services had a good year.
Our Industrial segment had a solid year, despite significant headwinds in our shop business that we have discussed many times. Our shop heat exchanger Services have historically been one of the most profitable revenue streams at EMCOR, however, our backlog revenues and operating profits are down over 50% over the last two years as a result of the decline in integrated oil company cash flows which drives the forward maintenance and reduce capital expansion spending. We made up for that and still grew revenues by 15.8% and operating profit by 37.9% as we executed well across our field Services business especially in our specialty Services.
In 2016 we executed some of the largest turnarounds that we have ever executed. We not only had that turnaround work, we had several large projects that we were able to execute for our customers that were complex and demanding. On these large projects we were able to mobilize insure order over 1,000 highly skilled trades people. Not many of our competitors could execute the work we did as it required extraordinary supervision, labor management and financial resources to mobilize the management. We can do this at EMCOR, but these type of project activities are usually not planned and we react to our customer’s needs.
Although this created headwind for us in subsequent periods for comparison, it is important, profitable and very good workforce. We like our position in these markets and have been able to not only Service our refinery customers well, but have built a very good petrochemical Services business since the acquisition of RepconStrickland.
The UK segment has steadied and now has had three straight years of solid contribution to our results. Our 2013 restructuring worked and the UK is ready to grow in a measured way. We have added some nice maintenance contract wins over the past year. We leave this year with a very strong backlog that despite the record organic revenue grew 3.5% versus the same year ago period and most of that growth is in our constructions segments. We continue to have a strong and liquid balance sheet, supported by consistently strong cash flows even when we have double digit organic revenue growth.
We had very good acquisition integration over the past three years also. We had a very strong 2016 and sure it could have been better, but it was still a record performance. And with that I’ll turn it over to Mark to cover the fourth quarter and 2016 in detail and I’ll be back to discuss backlog and the outlook for 2017.
Thank you, Tony, and my good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we’re now on Slide 6. As Tony indicated in his opening commentary I will begin with a detailed discussion of our fourth quarter 2016 results before moving to our full year 2016 performance, some of which Tony just outlined during his executive summary and is included in our consolidated financial statements within both our earnings release announcement and Form 10-K filed with the Securities and Exchange Commission earlier this morning.
So let’s review our fourth quarter performance. Consolidated revenues of $1.95 billion in quarter four are up $172.1 million or 9.7%. All reportable segments are reporting increased revenues quarter-over-quarter other than our UK Building Services segment. Incremental revenues attributable to businesses acquired of 71.1 million pertaining to the trade of time that such businesses were not owned by EMCOR on last year’s fourth quarter, positively impacted our U.S. Electrical Construction, U.S. Building Services and our U.S. Mechanical Construction segments. Excluding such acquisition revenues, our organic revenue growth in the quarter is 5.7%.
U.S. Electrical Construction revenues of 476.9 million increased a 119.3 million or 33.4% from quarter four 2015. Excluding acquisition revenues of $54.5 million the segments revenues grew 64.9 million or 18.1% organically. Quarterly revenue growth was primarily driven by project activity within the transportation commercial market sectors, inclusive of certain large scale telecommunication projects, partially offset by quarter-over-quarter revenue declines within the healthcare and water market sectors.
U.S. Mechanical Construction fourth quarter revenues of 722.3 million increased 62 million or 9.4%. Excluding acquisition revenues this segment grew organically 9%. Consistent with this segment’s revenue activities during late 2015 and throughout 2016, revenue growth continues to be broad based from a market sector perspective. Specifically during the quarter commercial water and industrial and healthcare contributed the largest dollar revenue growth.
EMCOR’s total domestic construction business fourth quarter revenues of 1.2 billion, increased 181.3 million or 17.8% of which 12.2% was generated from organic activities.
U.S. Building Services quarterly revenues of 438.5 million increased 2.7 million or 0.6%. Excluding acquisition revenues of 14 million, this segment’s revenues decreased organically 2.6%. Revenue gains within the Mechanical Services division were offset by revenue declines within the commercial site-based and government services divisions due to maintenance contract attrition as well contract scope reductions including lower and definite duration and definite quantity project volumes. Although the majority of contract attrition occurred earlier in the year, we remain selective in evaluating new maintenance contract sales opportunities.
U.S. Industrial Services revenues of 237.3 million increased 15 million due to increased turnaround activities from our industrial field services operations which were partially offset by reduced revenues from this segment’s shop services operations due to low levels of capital spending by our customers. This reduction in capital spending is a continuation of a trend that began to affect us in late 2015 as a result of crude oil price volatility.
United Kingdom Building Services revenues of 75 million decreased 26.9 million or 26.4% due to the 16.6 million impact of the continued weakening British pound as well as a reduction of small project and capital project activity when compared to 2015’s fourth quarter as an our UK customers are still assessing the short and long term implications on the business models as a result of the Brexit vote earlier in ‘16.
My last comment on quarterly revenues is that our fourth quarter revenues of 1.85 billion eclipse our previously established quarterly revenue record which we achieved in 2016 second quarter.
Please turn to Slide 7. Selling general and administrative expenses of 194.9 million represent 10% of revenues and an increase of 26.4 million from the $168.5 million reported in 2015’s fourth quarter. As a percentage of revenues, the current year quarter increased 50 basis points from the 9.5% reported last year.
The current year quarter includes approximately 9.3 million of incremental SG&A inclusive of intangible asset amortization from businesses acquired. Therefore, our quarterly organic SG&A increases approximately 17.1 million and is due to increases in employment costs as a result larger incentive compensation awards as a result of the improvement in full year operating performance. Additionally increased head counts supported strong organic revenue growth as well as higher medical insurance expenses were significant cross drivers on our fourth quarter.
Lastly, we experienced a greater level of bad debt expense which was concentrated within our U.S. Construction businesses. With regard to our quarterly SG&A as a percentage of revenues, the 50 basis point increase is due to the true up of incentive compensation awards in the quarter as a result of the over performance of certain of our operating companies. For those who are on the call who regularly follow us, you may remember that in early 2015 our SG&A percentage was high due to the impact of the same item, but for the opposite reason.
Despite a slow start to 2015, we’re recurring both short-term and long-term incentive compensation awards based on anticipated improved annual results over full year of 2014. As operating performance improved throughout the latter part of 2015, we saw a decline in our SG&A as a percentage of revenues, since those incentive awards or expensed ratably over the calendar year. Conversely in 2016, certain operating companies experienced better than anticipated operating performance in the last two quarters of the year, resulting an incremental expense to true up for actual year performance on our fourth quarter SG&A percentage exceeding our reported annual percentage of 9.6%, which is down from full year 2015.
Reported operating income for the quarter of 74.5 million, represents 3.8% of revenues and compares to 84.1 million and 4.7% in 2015’s fourth quarter. 2016 fourth quarter operating income includes 2.4 million non-cash impairment charge as a result of the diminution in value of a trade name of a business previously acquired.
Our U.S. Electrical Construction services segment operating income of 31.1 million increased 16.4 million or over 100% from the comparable 2015 period. Reported operating margin of 6.5%, represents a 240 basis point improvement over last year’s fourth quarter. This segment experienced 8.2 million of losses in several transportation projects during 2015’s fourth quarter as a result there is substantial quarter-over-quarter improvement in gross profit contribution from this segment’s transportation market sector activities. These projects were either complete or substantially complete at December 31, 2016 and the vision this segment experienced increased gross profit contribution from commercial and industrial market sector project activities led by certain telecommunication projects.
2016’s fourth quarter U.S. Mechanical Construction services segment operating income of 32.2 million represents a 26.3 million decrease from last year’s quarter. Reported quarterly operating margin of 4.5%, which is significantly less than 2015’s fourth quarter. This segment incurred a loss of 20.5 million in the current quarter on a project at a process facility as a result of a contract dispute with our customer.
This project negatively impacted the segment’s operating margin by over 300 basis points. The job was substantially completed at December 31, 2016 and we will seek recovery for our losses. As a reminder, during the fourth quarter of 2015 this segment benefited from 12.1 million of revenues as a result of the settlement of a claim on an institutional project for which we had recorded significant losses in reporting periods prior to 2014.
Our total U.S. Construction businesses reporting a decrease of 9.9 million in operating income or 13.5% over last year’s fourth quarter, with an operating margin of 5.3%, which represents a decline of 190 basis points over 2015’s fourth quarter.
Operating income for U.S. Building Services of 21 million increased 5.4 million or 34.8% over 2015’s fourth quarter. Reported operating margin of 4.8% represents a 120 basis point improvement over the last year’s quarter which reported 3.6% operating margin. The improvement in quarter-over-quarter operating income and operating margin is due to higher revenues and gross profit margins from this segments mechanical services division along with improved quarterly performance within the government services operations.
Our U.S. Industrial Services operating income of 11.2 million decreased approximately $600,000 or 5.4% compared to 2015’s fourth quarter with an operating margin of 4.7% or 60 basis points less than last year’s 5.3% operating margin. The decrease in operating income and operating margin quarter-over-quarter is partially attributable to cost associated with the close out of a large field services capital project which project revenues were predominantly recognized over the prior fourth quarters. This unfortunately masked stronger turnaround activities executed in the current quarter.
UK Building Services operating income of 2.8 million or 3.7% of revenues represents a $300,000 reduction period-over-period, which was due to $600,000 headwind from a weakened British pound. Quarterly operating margin improved 70 basis points from 2015’s fourth quarter operating margin of 3% due to a more favorable mix of revenues.
The impact on consolidated operating margin of the previously mentioned loss project within our U.S. Mechanical Construction services segment is a negative 120 basis points.
We are now on Slide 8. The table on Slide 8 lays out those discreet items that impact quarter-over-quarter comparability. The only item to address is the identifiable intangible asset impairment loss impact in the current quarter of 2.4 million. After giving effect to the add back to this item, 2016’s fourth quarter adjusted operating income would have been 76.9 million or 3.9% of revenues, which represents a decline of 7.2 million and 80 basis points in operating margin from last year’s fourth quarter. We have not included any project loss activity reported in the quarter as a pro forma adjustment as project gains and losses represent our normal business activity.
Tony previously referenced to a strong operating cash flow for the annual period during his commentary and from a quarterly perspective we generated 135.6 million of operating cash flow, which is good performance in another reporting period of significant revenue growth.
Please turn to Slide 9. Additional key financial data for the quarter not addressed on the previous slides are as follows; quarter four gross profit 272 million represents 13.9% of revenues, which has improved from the comparable 2015 period by 19.3 million, while gross margin decreased 30 basis points. The quarter-over-quarter improvement in gross profit is largely due to a substantial growth in quarterly revenues. The quarter-over-quarter decrease in gross margin resulted from the 20.5 million loss recorded within our U.S. Mechanical Construction segment as previously referenced.
Restructuring cost during the most recent quarter were immaterial and do not want an in-depth discussion at this time. Diluted earnings per common share from continuing operations for the fourth quarter is $0.69 as compared to $0.80 per diluted share a year ago. On an adjusted basis reflecting the add back of the non-cash impairment loss in 2016’s fourth quarter, diluted earnings per common share from continuing operations would have been $0.72, which represents a decrease of $0.08 or 10% from the comparable 2015 amount.
We are now on Slide 10. With the fourth quarter discussion complete, I’ll now augment Tony’s 2016 annual commentary. Consolidated revenues of 7.55 billion are up 832.8 million or 12.4% as compared to 6.72 billion of consolidated revenues in 2015’s annual period. Acquisitions contributed incremental revenues of 250.8 million pertaining to the period of time as such businesses were not owned EMCOR in the prior year and positively impacted our U.S. Electrical Construction, U.S. Building Services and U.S. Mechanical Construction segments. Excluding the impact of businesses acquired, year-to-date revenues were organically 582 million or a strong 8.7%. All of our reportable segments are reporting year-over-year revenue increases other than our UK Building Services Segment.
U.S. Electrical Construction revenues of 1.7 billion increased 337.3 million or 24.7%. Acquisitions contributed 158.5 million, resulting in organic revenue growth for 2016 of 13.1%. Increased project activity within the commercial, transportation and hospitality market sectors were partially offset by revenue declines with the industrial and healthcare market sectors.
U.S. Mechanical Construction 2016 revenues of 2.66 billion increased 349 million or 15.1% compared to 2015. Acquisitions contributed 45.9 million of revenues, resulting in year-over-year organic revenue growth of 13.1% higher projected revenues across the majority of the market sector in which we participate was a driver of the segment’s annual organic revenue growth and this revenue trend has been evidenced through all four quarters of 2016.
U.S. Building Services revenues of 1.79 billion increased 52.5 million or 3%. The majority of the segments revenue growth is attributable to the acquisition of Mechanical Services Company in April 2016. The modest annual organic revenue growth is due to increased activities within the segments, remaining mechanical services and energy services operations.
U.S. Industrial Services 2016, revenues of 1.1 billion, increased of 145.2 million or 15.8% compared to 2015. This segment annual revenue increase is due to capital maintenance project activity from our industrial field services operation inclusive of turnaround activity despite revenue contraction within the segment short services operations as a result of lower customer demand. Our UK segment 2016 revenues decreased 51.2 million primarily due to 41 million headwinds as a result of negative exchange rate movement’s year-over-year as well as reduction in revenues for institutional service project activities.
Please turn to slide 11, selling general and administrative expenses of 725.5 million, represent an increase of 69 million as compared to 656.6 million in 2015. This increase includes 30.3 million of incremental SG&A related to business acquired inclusive of intangible asset amortization. Additionally our year-to-date selling general and administrative expenses include 3.8 million of transaction expenses incurred in connection with acquisition of Ardent and Rabalais. As a percentage of revenues SG&A is 9.6% in 2016 compared to 9.8% for 2015 annual period. This 20 basis point reduction in our annual SG&A percentage demonstrates good cost control and a period of exceptional revenue growth. Year-to-date operating income is 308.5 million or 4.1% of revenues, a represent of 21.4 million increase over 2015 annual performance.
2016 performance includes two discreet items that favorably impact the reported operating income by 6.3 million which we adjusted for purposes of pro forma presentation. Therefore on an adjusted basis the year-over-year change in operating income is an increase of 27.6 million. All reportable segments are reporting higher operating income year-over-year other than our U.S. Mechanical Construction Services segment.
Our U.S. Electrical Construction services segment operating income of 101.8 million increased 19.5 million or 23.8% over 2015 levels and represents 6% of revenues for both periods. This segment generated higher gross profit from commercial transportation and hospitality project activity; additionally acquisitions favorably impacted operating income by 8.1 million for the year. This positive performance was partially offset by 19.4 million of losses incurred on the transportation, construction project in the North East due to productivity issues, attributable to unfavorable job site conditions for which we will seek recovery. This project which is substantially complete negatively impacted the segment annual operating margin by 120 basis points.
Domestic Mechanical Construction operating income of 133.7 million or 5% of revenue decreased 4.9 million or 100 basis points over 2015 full year performance. This segment operating results were negatively impacted by aggregated losses of 27.9 million incurred on two construction projects including an 18.3 million loss on a project at a process facility as a result of contract dispute with a customer and 9.6 million loss on an institutional project due to unfavorable job site conditions and delays. Such projects negatively impacted the Mechanical Construction segment, annual operating margin by a 120 basis points. These projects were substantial complete at the end of 2016 and we will seek recovery for all losses here as well. Additionally as previously mentioned during my quarterly commentary, this segment benefited from the settlement of 12.1 million claim in 2015 which resulted in a favorable 50 basis point impact of operating margin improvement in the prior year.
Total U.S. Construction operating margin of 5.4%, decreased 60 basis points year-over-year for the combination of current year project losses and the impact of 2015 favorable claim settlement within U.S. Mechanical Constructions. U.S. Building Services 2016 operating income of 75.8 million, increased 5.2 million or 7.4% due to increased profitability within the mechanical services division. Additionally business acquired during 2016 favorably impacted operating income by 2.8 million, the operating margin improved 10 basis points year-over-year at 4.2%. U.S. Industrial Services 2016 operating income increased 21.4 million or 77.8 million or 7.3% of revenues.
The year-over-year increase was due to strong turn around activities during both spring and fall seasons as well as strong demands for some of our specialty field services. Additionally the segment experience significant headwinds during 2015 because of the impact of the nationwide refinery operator strike. This improved performance was somewhat muted by the continuation of soft demand for short services due to lack of capital spend by our customers for the reasons previously mentioned during this call.
For UK Building services, operating income of 11.9 million or 3.7% of revenues, increased $300,000 due to an increase of gross profit from service activity within the commercial market sector as a result of recent contract awards. The increase was profitable was partially offset by decrease in operating income of 1.5 million, related to the effect of unfavorable exchange rate movements during full year 2016. For the state of completeness the impact on EMCOR’s consolidated annual operating margin as we previously mentioned loss projects that incurred within both of U.S. Construction Services segment is a negative 70 basis points.
We are now on slide 12, consistent with reconciliation previously on slide 8; this page reflects the operating income reconciliation for the two annual periods from GAAP to pro forma adjusted earnings for the few items that impacted 2016. Added to this reconciliation from the quarterly reconciliation previously discussed, the transaction expenses related to the acquisition of Ardent and Rabalais had occurred in April 2016. Adjusted operating income reflected in add back of these two discreet items listed is 348.7 million or 4.2% of revenues as compared to 287.1 million or 4.3% of revenues in 2016, an increase of 27.6 million or 9.6%.
The annual tax rate for 2016 is 37.5% as compared to 38.1% for the 12 month 2015 period. The improvement in the 2016 tax rate is due to the favorable impact of these option as new accounting announcement which requires the income tax benefit associated with share based compensation to recognize from the income statement when the [indiscernible] [0:07:41]. These income tax benefits will recognize the previous years as components of stock holders exactly.
With regards to 2017 planning, I anticipate a normalized income tax rate between 37.5% and 38%. However as I previously mentioned in past calls, this rate can fluctuate in many discreet tax events occurred during 2017.
Please turn to slide 13, Additional key financial data on the slide not addressed during my 12 months summary are as follows, year-to-date gross profit of 1 billion is higher than 2015 by 93.4 million, however gross margin is down 40 basis points year-over-year. Total restructuring cost of approximately 1.4 million or higher than 2015 activity due to consolidation of certain back office function within our U.S. Building Services segment and the closure of underperforming subsidiary within our U.S. Mechanical Construction services segment.
Diluted earnings per common share from continued operations for the year is $3.2 compared to $2.72 per diluted share a year ago. On an adjusted basis excluding the impact of acquisitions transaction cost as a non cash impairment loss on an identifiable tangible assets, 2016 year-to-date adjusted diluted earnings per share were $3.9 as compared to 2015’s reported $2.72 per share representing a 13.6% increase year-over-year.
Please turn to slide 14, EMCOR’s balance sheet continued to build up on its strength and liquidity, our cash balance has decreased since year end 2015 primarily to funds expanded for acquisitions, common stock repurchases and dividend payments, net of incremental borrowings from our amended credit facilities. Such decreases were offset by strong operating cash flow performance during the year.
Working capital levels have improved primarily due to an increase of accounts receivable as a result of our organic revenue growth, changes in good will and identifiable intangible asset balances reflect the impact of acquisitions made during 2016 net of 40.9 million of intangible asset amortization expense and the impact of the identifiable intangible asset impairment loss recorded during the fourth quarter totals out to 423.3 million, represents a net increase of approximately 108 million from year-end 2015 due to funds drawn against the revolving credit facilitator closing of the Ardent and Rabalais acquisition previously mentioned.
As a result of our outstanding borrowings we currently have a debt to capitalization ratio of 21.6% which is down on sequential basis from the third quarter as we are paid down a 100 million of principal outstanding under our term loan at the end of 2016. We remain happy with our balance sheet and are exceptional cash flow conversion during the year and as a result we continue to be in a good position to capitalize on all opportunities.
With my extended portion of this presentation concluded, I was much relieved and I would like to return the presentation back to Tony.
Thanks Mark. You deserve some water. I’m on page 15, which is backlog by market sector. Our strong year is also reflected in our backlog. Total backlog at the end of the fourth quarter is 3.9 billion, up 132 million or 3.5% from December 2015 and flat with backlog at the end of third quarter. Book-to-bill for the quarter was 1 and for the year it was 1.02.
Similar to the third quarter project books remained strong in fourth quarter demonstrating strong ongoing construction at mechanical service demand consistent with our generating record revenue levels. When you focus on the market sectors, we have seen strong demand from the commercial sector all year as commercial backlog increased close to 10%, to little over 1.3 billion is pretty much on par of the highest level ever.
Healthcare backlog was 10% of total backlog increased every quarter this year and in the fourth quarter we won multiple pharma projects in the New York area as well as large healthcare projects in Cincinnati. We remain long term positive on the healthcare market, mainly driven by changing demographics, ageing facilities, advancing technologies and underlying all that is hit the requirements in privacy. However there is going to continue to be some dislocation in this market as congress administration figure out what changes to the affordable care need to be made or whatever is going to happen with in place.
Our institutional workers down a bit with backlog off about 14%. However this is in line with the general trend in the public non-residential market. And as it began, this could for little bit under the new administration. With regard to total private non-residential market generally speaking we believe the market still resonate after pretty good 2016. We remain where were a quarter ago being cautiously optimistic of mid-single digit growth in 17, which in line with most market forecast we have seen, we might be a little bit more conservative but the election had led to a more positive view on potential business investment.
Let me provide you an anecdote, we are seeing specifically with some of our auto and high tech customers and we are positioned to benefit from significant work as they look to invest more on what they believe will be a more favorable business driving. So what create that more favorable business environment specifically? The new administration has discussed the following; infrastructure revitalization; pro U.S. energy complex, expatriation of overseas cash, tax reform, potential change in lower labor regulations, all this could potentially elongate and add momentum to the non res construction cycle and could create positive momentum throughout 2017 and into 2018 and beyond for companies like us.
Now, moving to page 16, which we have backlogged by segment, our Electrical, Mechanical segments have been the main contributor to the company’s backlog growth in 2016. Backlog for our domestic construction segments is up 250 million or 7.6% from December 2016 as we have been are well positioned to benefit from continued growth in the non-residential construction market. The mechanical construction segment backlog grew 139 million or 8.3% year-over-year or the electrical construction segment ended the year with backlog of 75 million or 6.5%.
Backlog growth of corresponding record revenue for the year is a testament to the velocity we are seeing in the construction segments. Backlog in our building service is down to just over 100 million with all of that reduction in our site based and government business. Backlog in our mechanical mobile services division on the other hand is up about 7%. Our industrial services backlog stands at 51 million unchanged from the third quarter and 5 million lower than December 2015.
I currently don’t expect any change in our shop backlog, as the led by the integrated oil companies continue to recalibrate careful spending. However we do believe we are at the bottom in our shops services business and with the high levels of utilization in the refineries, we believe the spending eventually has to pick up again. Again I would remind you that this backlog in industrial services is our shop backlog, however we continue to see strong demand for field services as we said before this time and material work is therefore not in backlog. UK backlog is up on the back of a few large service project and contract awards.
Our backlog reflects positive demand as we head into 2017. With that I will turn to 17 on page 17 and 18. Now turning to 17, our initial guidance will be $3.10 to $3.50 per diluted share from continuing operations and 7.5 billion to 7.6 billion in revenues. We do expect to growing non-residential market in the mid-single digits and we expect to refinery and petrochemical market. But we do not have visibility that we would like to have it yet in the second half of 2017 overall but especially in our industrial services segment. We also have a gap to fill, especially in the second and third quarter in our industrial services segment. And as we had very good success as we discussed several times over the course of last few quarters and the second and third quarter of 2016 on some large project that we currently do not have a near term replacement for in early 2017. The question is how do we move to the top end of the range in 2017, much like we did in 2016 where we actually exceeded the top end of our initial guidance range.
Some of the actions depend on us and some will depend on our end markets and customers. We have a good backlog in our electrical and mechanical construction segment and for us to move to the top end of the range. We need to expand markets through the year and we cannot have the levels sizeable dispute right down that we had in 2016. Overall we execute well but we need to have more of an absence in our portfolio to move to the top end of the range. We do expect a decent market but very difficult for us to achieve level organic growth we had in 2016 again in 2017.
With our acquisition of Ardent and Rabalais last spring, we bought an option that we didn’t have on midstream and upstream oil and gas segments. We are seeing some string of activity and interesting anecdote is this prior to the election in the midstream market, our own customers were talking with orders about how they would complete permanent projects. To now after the election they are reengaging contractors, engineers of how they can accelerate pipeline projects. Although recounts are up, drillers are largely returning to places that have the electrical infrastructure for drill in place.
The next round of increase should occur in areas that will need that infrastructure, if this happens in the mid and upstream markets then we will have the opportunity to move to the top end of our range. Further, we need to continue to show the steady improvement we have had in building services over the last four years and when we need to have mechanical services lead the way. We expect to continue to see opportunity in our retrofit energy savings projects and expected growth in our self-perform site and government offerings.
In the Industrial Services segment we have clearly gained share over the last three years in this market. Our biggest challenge will be replacing our success from last year is likely to take more projects and increase turn around growth, we now have versus what we now has seen to have the same strong performance this year as last year. The work in the segment can turn quickly and can expand or contract with limited visibility.
Outside of strike two years ago, we have largely benefited from our expanding our services scope to our customers and the move to the top end of the rate we will need to see that happen again in 2017. We don’t expect and our planning any significant rebound in shop services but we do think we have reached bottom at the bottom to the market and if oil prices continues to stabilize and it have some increases we should see spending return. But also be helpful for the segment that the regulatory environment may not be so punitive to some of our customers.
In the UK segment is continue to have a steady improvement. Across our portfolio we continue to have cost discipline and when we continue focus on execution, that we are well known for it. As for the deployment of cash, we will continue to grow the business organically first, add acquisitions across our portfolio and in January we executed nice buyer protection acquisition and we are well cash to shareholders for dividends and buybacks. We have a pretty track record of executing all the above as for acquisitions we would add to any of our segments to this time from establishing new geography or capability in our construction segments through geography or increased presents for our mechanical services business or additional service or capabilities to a broader building services portfolio and industrial services portfolio.
And with that, I’ll take questions and turn the call to Sylvia.
[Operator Instructions] Your first question comes from the line of Tahira Afzal from KeyBanc.
Thank you very much. Hey Tony how are you doing?
I’m doing fine how are you?
I’m doing fine. If I look at this year you have tough comps but at the same time it is based on potentially everything that is being proposed by the new administration. It seems that could be a longer leg, to even private commercial cycles and you have probably anticipating last quarter.
I would agree with that, I think private investment is starting to feel more confident and as anecdote I gave on oil and gas, some of the hi-tech spending we are about to see. Some of the auto investment we are about to see. I think all go well for us. So the question is timing T, these things need to be designed, they need to be bid but clearly they are in markets that perform very well and we think at a minimum it elongates the normal cycle and it could give a boost going into the end of 2017 and 18, I do agree with that.
Got it, I mean 2018 it sounds like, organic growth could be the same potentially when higher, if all of the space through right.
Yeah, it could. If you were the same as it was 16 I think would be satisfied, I think what we are seeing right now we have good backlog growth in our electrical mechanical segments. So we are seeing continued pace of recovery and I don’t think anywhere backed in those numbers yet is positive momentum from all the things we talk about which we foreseen post-election. So we may have a little bit of a wall here and 17 between these two periods but business investment and large complex projects continue to gain legs and things need very highly skilled manpower in the short period of time. They are clearly our sweet spot and we will be there to take advantage of it. One of the reasons we can take advantage of it is not only in the organic investments we made over the last five - eight years but also the acquisition investments have put us in markets today. Five years ago we could be in, whether that be industrial market in South East, oil and gas market upstream and midstream or even more significant investments over the last 10 years we have made downstream.
So we feel good about all that and we have to navigate that. We got to pick the right projects and we got to execute fairly almost times.
Got it Tony, I guess second question, how should we be thinking about inflation and labor bottleneck point of business as you had a very strong year. We have seen inflation in that and labor pricing remain fairly decent over the last four years. Does that might change?
Yeah, way the pricing has stabilized and we relate and I don’t see anything in the near term say, 12 to 18 months that we say we have changed much. But if we have seen another surgeon activity overall in the market and if it starts going towards higher mark, you may see some labor inflation. Now realize our folks are pretty well trained now. And they get that and in some way they rather have the work. In reality whether be union or non-union environment, the trade people that we have dealt with over the last five years have been fairly pragmatic about what they are looking for. We have a couple of places not so much, you could probably guess that. Some of the union markets but when you get outside of there, people are pretty pragmatic, they want to work and wages are good right now; demand is good now; they want to work or want the one of the better people to work for. Even when we get in disputes like we got in some of these yards that folks no they are going to get paid. The disputes our problem, not their problem and we are going to be able to get the job done safely and we are going to be able to technically get the job done correctly and really that’s what trades people care about.
Got it. Okay and thank you very much. I’ll hop back in the queue.
Thanks to you.
Your next question comes from Brent Thielman from D.A. Davidson.
Thanks for taking my question. On Industrial Services, kind of look at last couple of quarter. Is it sort of level of probability you would expect for the sharp business going forward and mid-single digit, Guzzi can you tell what going on in that business?
Yeah, I think we had very successful execution on some specialty work. We have mid-single digits of our rate, for us to get back up into the higher single digits, below double digits mark we need to see the shops return.
Okay and then also on that business, do you see other projects like the one you did earlier this year, the sort of field services projects that could potentially play out in 17?
You never know Brent, well these things happen, we know something is going on right now, they could potentially take us there I guess guys if we looked over the last five years, we had three of those events. So better than average we will see something maybe not that big. One thing we have seen is our folks have gotten better and better at large turn around. We become in some ways the go to contractor for that and the other things we have seen is we really got more significantly into the petrochemical business since the acquisition RepconStrickland. So we not might make it up with the specific project or two. But building that footprint out, being more facilities, being known to someone can commercial very skilled people and very short period of time, allows you to be the person when those opportunities come around to be the person that they turn to and that’s all we can hope for and then we got to win the work and go and execute.
Okay, that’s great. And then Tony I am curious kind of how you thinking about the UK business in the contacts to your outlook for 17 and seems like fair amount of uncertainty right now in that area.
What we do in the UK and I’ll ask Mark to help me with this because he has spends a lot of time thinking about the UK driver structuring. We shouldn’t see a lot of variation is because one is the overall impact in our numbers is not that big. It is less than 3% or 4% anyone of our numbers revenue we are operating profit. We also have some very significant long term customers that were in more critical facilities and some of them are government, quasi government or large industrial type customers. So the uncertainties there but I think you know our folks are focused on what they can control and I don’t expect big bumps from that Mark.
When you look at the composition of the business. The core maintenance contracts that we are executing under are all very good contractor where you are able to get little improvement and margin is on the project side and clearly we say everybody hit the pause button post Brexit with regards to any kind of significant small project or even small capital spending. I suspect that will free up at some point, it is a sequential of what is going to be the indicator that our customer are going to need to be able to distort excuse underneath, what their plants are. Ultimately before you run into break or fix. You are not break or fix I don’t think we are out at that point but I think we have another year like we saw this year. They are going to be there pretty soon.
And we really saw that in our mechanical service.
Okay and last one if I could just the project in Mechanical this quarter anything unusual about the project or the work performed I guess in context that you tend to do in that business?
Yeah, something very unusual. Our customer decided not to pay us when they over ran their budget and we will be looking for entitlement on it, that’s so unusual about it.
Okay, thanks for the color guys.
Your next question comes from Noelle Dilts from Stifel.
Hey Noelle, how are you?
Hi, doing wells, thanks good morning. First question I just want to expand a bit on first question on Industrial Services, if you look at some of the I guess industry sources out there, they are indicating pick up in general turn around activity in the spring season. My question is do you think there has or - are you seeing fundamental change how refiners are acting and second can you talk about what the split is how that business at that point between refinery and petrochem and how you are thinking about the outlook for each of those sort of customers possibly into next year.
Let’s go split overall right now, it still probably 85% film, 15% shop. They used to be 70-30, so let’s go there. Dallas go to 85% which is where the most petrochem business is probably 70% refining, 30% petrochemical, that mix, so the revenue is bigger, that mix years ago would have been 90-10. So we have added some nice mix there. One of the larger turn around we did I the fall was actually in petrochemical plant. I think see the very similar rate, a lot of things are set up favorably for both of them. We also believe that the spring turn around season is good; the fall will warm up. Well we have benefited and this makes the comparison so hard is we jump in there and we will do either capital work kind of material, some capital works, small capital work fixed price in that.
The segment is very, very little in that. But when you do those larger projects outside of the turnaround activity, it can skew you results, you just only have to look at this like a two year window and if you look at it over three year, we barely gain share because the market has been growing, very low single of digits and we have been way above that, two to four times that in a given quarter. While the things trends we have seen and if we could be selection of services we offer for the capability of our field folks or project managers or superintendents and our CEOs run this companies.
We have seen a trend towards larger turn around for us. That could just be more confidence in us to be able to execute the work. So believe maintenance spending will be strong if lumpy. It could be just reflection of our customers either succeed or don’t succeed but we don’t see a real negative market over the next 18 months and with our continued to fill in the chemical we continue to build stability in the market but for us to perform at very high levels, like we did last year, we needed that icing on the cake of the project work.
And then for my second question I just wanted to shift to two construction side, here I know I guess - one thing I wanted to touch on is a when you look at some of the general and again the industry forecast, I think if we look up to ‘17, dodge et cetera are looking for a bit of a shift towards institutional spending. It doesn’t sound like you are necessarily expecting that. Some like you are kind of reflecting more of the commercial side to remain strong. So first said, I’m curious if you have any thoughts on that and then second I am always interested on spot on particular geographies and appears to steady for states either showing some improvement.
So the first question is, we are seeing some institutional opportunities over there and will balance us against the private opportunities. Some of the best work we have ever been done has been institutional. Some of the best work we have ever done were private, some of the orders we have ever done is institution some of how we have ever done is been private. So we look at them opportunity by opportunity. I don’t disagree that institutional should come back but I think it is going to be lot less than people think, just sitting here today because people try as government is basically the people that actually left the contracts are sort of frozen in place right now for the next months as they figure out who is in charge, actually signed the authorization. Shifting gears, will give you little color on geographies and north east is pretty good job [ph] especially in Boston I do expect New York to slow down some, not so much on the infrastructure side but on the commercial and high rise residential. We continue to see strong demand for our industrial services through the South East.
We think South border is going to be strong for us for the next three years at least as we have very good position on waterways project and with the consent degree in Miami we think that creates opportunity for us and there is only couple of contractors that can really do the work well and we also get our share. Our tax is more remarkably resilient in the sense that previously if oil prices would adjusted the way we would fell off the face of the earth. The part of Texas continue to be strong and with our acquisition of fire protection company, we actually brought ourselves more of an open into the commercial and healthcare and something in data centre market through the South West and even nationwide. The California has been strong. I think the part of that strong for us is because of the position we have in each of the markets. There is going to be some infrastructure work done in Southern California transportation wise, we have benefited from the port work.
There has been some hi-tech better word manufacturing is more hi-tech, R&D and development in South California around the San Diego continues to be strong. North of California continues to be strong. We’re very selective in what we will do in Northern California on the commercial side because it could be very difficult building environment with all the rules and regulations. The Midwest is holding its own. Chicago, we have a nice position in the Chicago market. We continue to do data center work there as well as in the Pacific Northwest. We have an electrical contractor in the Northwest, Randy and his team do a phenomenal job serving our customers throughout the Pacific Northwest and we couldn’t be more proud of them. And then as you go towards other sectors, we’ve had a very, very good run here in improved service, improved process and we expect that to continue.
Very helpful, thanks.
Your next question comes from the line of Adam Thalhimer from Thompson Davis.
Hi Adam, welcome back.
Hey, good morning. Congrats on a good ‘16, thanks. Lots of questions on Industrial Services, I just wanted to ask one more. As it relates to your guidance, I guess you’re assuming probably a double digit revenue decline there this year?
Well what we’re saying at the low end of our guidance is we don’t successfully refill that project in any substantial way and that’s really what we’re saying.
Okay. Well, I was going to switch gears to the three jobs where you had a loss this year. Are you assuming any recovery in the guidance?
We never assume any recovery in our guidance. We don’t know when it will happen, how it will happen, what the cost will be. Yeah, we have an idea of that part, but we don’t assume any recovery because one of the benefits of being us, if we can hang in there. And we don’t have to accept substandard settlements and we won’t. So that’s one of the big reasons we don’t even try to project when this will happen. Our general counsel and our CFO could be hard headed as is our segment people to making sure that we get to something that resembles a rightful entitlement.
Okay and then you referenced the telecom project a couple of times in the prepared remarks, not something you normally talk about, just hoping you could provide some color.
We’re seeing great demand right now for data center in multiple geographies and we’re well positioned to continue to do that.
Okay, I just wanted to take one more step at the top line because I think - I guess I’m confused regarding to basically flat risk when -
Let me take that out for you Adam. I’ll save your imaginations. We do expect some weakness industrially, I don’t know if it is severe as what you’re saying, but that’s an issue for us because we did so well last year and so well over the last three years. You can’t keep growing the level we were put up large project in there it can have an outsized impact on your revenue. The second thing is go back to our backlog discussion. We talk about $100 million coming out of our building services backlog year-over-year and that is really driven by a couple large site based contracts where one of them we had for 15 plus years and it’s more than half of hat backlog decline. And what happened there was outstanding performance by us, I think the cluster more [ph] acknowledged that we had outstanding performance. The shape and size of their portfolio is going to change, generationally they had a change in leadership. They decided to in source a bunch of things that were out sourced.
They’ve decided to our task in certain generally facility managed. We did that contract to make money and we had seen declining margins a lot which is not uncommon in something that you’ve had that long, it’s quite large. So we are probably on our way out of there in a year or a year and a half based on just margins alone from us. The HR ended it, we’ll leave friends and we’ll probably do some great mechanical service work for them over the next three years. That could be - two other ones like that that have gone from very profitable to rebid not profitable takes 100 million out and they’re winning other things but the ramp up on those once you win something can take a year and a half to get to full ramp, much like it did with this one 13 years ago when we finally won the whole thing. So that’s part of it, that’s not the most profitable part and hence why we have an upper range. And then we have industrial services, we do expect growth in mechanical services and we expect growth in our electrical and mechanical segments construction. Yeah, healthy growth.
Okay, that’s good color. Thanks Tony.
Your next question comes from John D'Angelo from Macquarie
Good morning John and welcome to the call.
Good morning, thanks for taking my questions. So, most of my questions have already been answered, so just two short questions from me. Which states performed best for the Electrical and Mechanical segments in ‘16 and then which states do you see performing better in ‘17 than 2016? Thank you.
Did you say states?
We don’t really think about that way. I guess I could give you regions to ones that performed very well electrically. Really other than our large Northeast infrastructure project, we performed well everywhere electrically last year. So, one project, take that out, it was broad based strong performance mechanically. I’d offer the same thing, we had one project out west that we discussed here in the fourth quarter that will seek our right for retirement for. We had an institutional project that really wasn’t - it all came to add at the end, but it really wasn’t in 2015, but if you look at our portfolio across the country, our guys are not getting out of the park. These are two isolated incidents, so we had a maybe a little bit outside performance in a couple of places, but we didn’t have really any bad performance outside of that across the company.
Okay, thank you very much.
Your next question comes from Tate Sullivan from Sidoti.
Hey, thanks for getting me in. I haven’t heard you mention any sources of potential pent up demand if you do get everything that might happen in terms of taxes and less regulation, I mean is there any pent up demand related to ongoing energy efficiency effort in our country?
I’m not a big pent up demand kind of guy. I think we see - I think you practically go back to our transcripts, over the long period of time I’ve talked about it a lot. I think I did mention it last year in mechanical services and retrofit business. Mark used it today a little bit to talk about why some of the trends are happening in industrial services. I think in general. I think there’s something there Tate, as more money becomes available you go to - you asked something very specifically about energy savings projects. I happen to believe this would be an easy win. There were some legislation they tried to get through, it got so water down, I’m not sure if it was particularly effective and I’m not sure of past [indiscernible], we were a little bit involved in that year’s ago on the front end, we certainly did recognize what came back out of the other side. But if you have more cash, most energy savings projects are sort of 15% to 20% return projects, they are air conditioning lighting focused, that then controls, that’s how you make the money in them. And so yeah, I think people look to invest there. I think you look at the investor even beyond just the energy savings even here right. The level of comfort you can achieve with some of the technology that is available now is pretty substantial compared to what some of the old systems were. So I think that is a place to reform more cash in owners pockets looking for projects to invest in infrastructure, why not investing your own infrastructure.
Okay, thank you.
Your final question comes from Nicholas Coppola from Thompson Research.
Good morning, this is Steven on for Nick. A quick question on the energy end markets around the country, just the regions exposed to it is non res activity still depressed in those areas or is that coming back at all?
The only non res market that we participate in that’s exposed to those energy markets in a substantial way is Houston. And I guess we’re going to pick it up now with our fire protection. They never had depressed because of the other things going on. In Houston, it was depressed and yeah, it’s not come back in a substantial way. You got remember, take it aside though, a lot of these folks from [indiscernible] they put a lot of money into their facility, part of it is a natural process. We were involved in four major campus expansions for integrated oil and gas, for campus consolidations, for integrated oil and gas companies or petrochemical companies from 2011 to 2016, so even if there no downturn, they likely wouldn’t be spending at the same level they were during that time period because they already build out their infrastructure.
Right, that makes sense. And then last question, has the Brexit impact in the continuing uncertainty they’ve made acquisitions enticing for you guys in the UK?
No. Anything else?
No, that’s it. Thank you.
There are no further questions at this time. I’ll now turn the call back to management for any closing remarks.
We look forward to performing for you in 2017 and we’re off to work. We had a great 2016, could have been stronger, but that’s behind us. Look forward to talking to you in April at the end of first quarter. Thanks a lot. Bye.
Ladies and gentlemen this does conclude today’s conference. Thank you for your participation. You may now disconnect.
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