EMCOR Group, Inc. (EME) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Nathan Elwell with FTI Consulting. Please go ahead.

Thank you, Christie, and good morning, everyone, and welcome to the EMCOR Group conference call. We're here to discuss the company's 2013 third quarter results, which were reported this morning. I'd like now to turn the call over to Kevin Matz, Executive Vice President, Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Nathan, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the third quarter of 2013. For those of you who are accessing call via the Internet and our website, welcome to you as well, and we hope you have arrived at the beginning of our slide presentation that will accompany our remarks today. Please move to Slide 2. Slide 2 depicts the executives who are with me to discuss the quarter and 9 months' results. They are Tony Guzzi, President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Mava Heffler, Vice President, Marketing and Communications; and our Executive Vice President and General Counsel, Sheldon Cammaker. For call participants not accessing the conference call via the Internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under Presentations. You can find 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, changes in the specific markets for EMCOR's 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 2012 Form 10-K and in other reports filed from time to time with the Securities and Exchange Commission. With that out of the way, please let me turn the call over to Tony Guzzi. Tony?

Good morning, and thanks to everyone on the call for joining our Q3 2013 call and your interest in EMCOR. This morning, I'm going to speak to the pro forma numbers, and Mark's going to walk you through the reconciliation in his section. Consistent with last quarter, we have 2 pro forma items: the U.K. construction closure and the cost associated with that, and the deal cost from our acquisition of RepconStrickland. And I'm on Page 3. Also, you will see a resegmentation of our business with results from our operating team management realignment, post-RepconStrickland acquisition. And I think, as investors, you'll like that because it gives you greater transparency and easier comparisons as we go forward here for our businesses. Really what we did is we took the U.S. Facilities Services segment. We broke it into 2 segments: the Building Services segment and the Industrial segment. The U.K. electrical construction, and mechanical restructure remain the same. Building Services is now the Mechanical Services, Government Services and Site-based Services parts of our business, and Industrial Services would be Ohmstede, Redman and RepconStrickland. Let me go through a little on the quarter and how things are shaping up year-to-date, and I'm on -- going to be on Page 4 and 5. In Q3, we had revenue of $1.629 billion, and that was just up slightly versus Q3 of '12. If you look at the underlying pieces, we had pretty good growth in Electrical, which has been our most steady business over a long period of time. We had some growth in Mechanical. We had okay growth in Building Services despite really tough headwind in our Government Services business, although they're still nicely profitable. And we declined in Industrial, which was really not a surprise just even with the acquisition of RepconStrickland. As we discussed last year in Q3 2012, we had an exceptional quarter in that quarter, and it really can show you what can happen when volume builds in that business in Q3 2012. Typical Q3 for us in that business is not as strong, and you'll see that on a go-forward basis unless we have an extraordinary event like we did last year, where a customer really needed our help. We made $0.42 -- $0.48 per diluted share on a pro forma basis and had good operating performance in Electrical. And I'd point out we had record performance in our Building Services business at 5.1% operating margin, and that really was the highest operating profit dollar performance for those businesses. And again, that's despite headwind in the Government business. We had improved performance in Mechanical segment as we expected, and we had a weaker Industrial performance for the reasons I mentioned. And we've been talking about that since Q3 2012 that we had a tough compare. We were a little bit above breakeven in the U.K. despite continued construction losses and construction closure causes. I think if you take those numbers and add them back, you'll get a better sense of what the ongoing run rate is in the U.K. business. Cash flow is very strong at $120 million in the quarter. Before I turn it over to Mark and he gets more in detail into the quarterly numbers, I thought I'd provide some context on the year-to-date performance here at EMCOR. We've had quite a year. I'm going to go through the positives first because I think the positives really set us up well for the long term, and they provide fuel for long-term success. First, we're about 80% to 85% of the way through our closure of our U.K. Construction business. And for those that have followed us over a long period of time know that, that business has had erratic and usually disappointing performance, and it'd be good for investors that will get behind us and for us. Our headcount is down 70%, and we expect it to be down 90% in that business by year end. And this has been a very tough restructuring, and it needed to be done. And we worked on it over a long period to be able to do it. It has a very good return for our shareholders. We had outstanding performance from our Electrical business, where we continue to perform at industry-leading margins. And when you see that, and we're doing that in an environment that has less than robust pricing. We're achieving those margins through just plain old execution. And quite frankly, if you look at the Mechanical segment, we've talked about the 2 jobs that we struggled with. It also is performing very well, and you can see some of that here in the third quarter. And I'm going to go through the 2 difficult jobs, and Mark will also a little later. Our Building Services business are really much improved and are driven by improved performance in not only mechanical service, but also commercial site base. Very specifically, we're starting to see the benefits of the pull-through work on a broader customer base as we build out that business through organic growth and through acquisition. And those margins in that business are now almost at 4% year-to-date, and we clearly want to get on a sustained basis, where we are now at 5%, and we think we have a roadmap to do that here over the medium term. And we executed a large and transformative acquisition that we are very excited about in RepconStrickland. We did that to strengthen our position in downstream refining in the petrochemical markets. We've built on our already strong performance. And if you look at the Industrial business' performance today, it's up off of an already very good year that we had in 2012. Third quarter is seasonally weak, and you will see that in our numbers on a go-forward basis now that they'll be broken up. We love the long-term fundamentals in this business. We talked about it at the time of the acquisition, and we believe we're set up for success in the future. sure, we've got a get through the integration, which we're well on our way, and we've had good reaction to customers, but we're very excited about the prospects for that business over both the near and long term. However, we've had headwinds this year. Some of them were of our own doing and some of them weren't. Let's start with the ones that really have nothing to with the EMCOR-specific issue. We've had a no to slow growth recovery this year in the nonresidential construction market although there are emerging signs that we're finally maybe breaking out of that. We had expected at least modest growth in 2013, and it really just isn't materializing in the end market. We knew we had to fight the effects of the sequester, and it's beyond the sequester. I would just say it's difficult government decision-making and the government's always been a decent customer to work with. We thought it was going to cost us about $0.05 per share, and we thought it would be mainly contained to our Maintenance business. It looks like that number now when you add on the effects of the shutdown and everything that goes with that and what we talked about in the second quarter, it'll be closer to $0.15 to $0.20. We're seeing it beyond the Maintenance business. We've had delayed awards. We've had a slowdown in schedules on existing jobs. We've had general processing change orders and requests for accrual adjustment for work that the government directed us to do. We know these issues will be resolved, and we know we have clear entitlement in that direction, and we've taken a very conservative view to date of what that will be, but we are less confident that they will be resolved this year. When you go to the Mechanical segment, we absorbed over $20 million on losses on 2 jobs, which is very unusual for us. We had discussed both in detail before, but let me refresh them now. One was an industrial job for a private client where we had to replace our subcontractor because they failed to perform. And being EMCOR, we work on a fail to perform for our client. It is very unusual for this to happen to us for 2 reasons. One, we only work with subcontractors we know well in a significant way, and we know them in a significant way. The reality is we did know the subcontractor well. We knew them for over 30 years. Number two, we typically don't subcontract much work on a construction job because we self perform most of it. All that being said, we lost over $9 million on this job on a year-to-date basis. We're substantially complete and expect no more pain on this job. The systems work, the plant's operational, and we did deliver for our client. The only silver lining in that here is we will be the go-to mechanical maintenance contractor for that client on this job site for years to come. The second job is a DOE job that we've talked about, and it's cost us over $12 million year-to-date. We have been very conservative in our view to recovery on this job. This job suffers from some of the same issues around government funding and decision-making that we have previously discussed. Backlog continues to be strong at $3.93 billion, and I'll talk more about that when we get to that section. We believe we continue to work towards the right mix of backlog. We have a decent pipeline of work that we are very close to winning, we think, here in the fourth quarter and in the first quarter. And we continue to see opportunities across our businesses. With that, I'll turn it over to Mark.

Thank you, Tony, and good morning to everyone participating on the call today. For those participating via the webcast, we are now on Slide 6. As Tony indicated, I will begin with the detailed discussion of our third quarter 2013 results before moving to year-to-date key financial data derived from our consolidated financial statements included in both our earnings release announcement and Form 10-Q filed with the Securities and Exchange Commission earlier this morning. Consolidated revenues of $1.63 billion in the quarter are up 1.4% from 2012. Revenues attributable to businesses acquired of $47.7 million positively impacted our U.S. Industrial Services and U.S. Mechanical Construction Services segments during quarter 3. Excluding the impact of businesses acquired, third quarter revenues declined organically 1.5% despite the majority of our reporting segments generating organic revenue growth within the quarter. Domestic Electrical Construction revenues increased 6.8%. Domestic Mechanical Construction revenues increased 3.9%. U.S. Building Services revenues increased 3%. U.S. Industrial Services revenues declined 11.6%, while our U.K. segment revenues decreased 16.5%. Revenue growth within the domestic Electrical Construction segment can be attributed to increased project activity within the quarter in the commercial, institutional and transportation market sectors, predominantly within the Western and mid-Atlantic geographies. Revenue growth within the U.S. Mechanical Construction segment can be attributed to increased project activity within the industrial market sector, primarily related to power generation and food processing activities. U.S. Building Services revenue growth within the quarter was due to increased demand within the Mechanical Services division, offset by revenue declines from both government and commercial site-based services due to both reduced levels of indefinite duration and definite quantity project opportunities due to sequestration, as well as the strategic reshaping of our commercial site-based business project portfolio, which we have referenced due to the last 2 quarters. Consistent with my last 3 quarterly commentaries, the decrease in revenues from our U.K. segment is the result of our continuing plan to withdraw from the engineering and construction activities. Please turn to Slide 7. Selling, general and administrative expenses increased $15.2 million within the quarter, inclusive of $8.4 million of incremental SG&A, including intangible asset amortization expense from those acquisitions completed during 2013, as well as $4.7 million of quarter 3 transaction expenses pertaining to our acquisition of RepconStrickland. As a percentage of revenues, SG&A in quarter 3 is 9.2%, excluding the $4.7 million of transaction costs incurred during the quarter, our SG&A as a percentage of revenues would be 8.9%. Operating income of $54.1 million represents 3.3% of revenues and compares to $68.6 million of operating income and 4.3% of revenues in 2012's third quarter. Our U.S. Electrical and U.S. Building Services segments reported income growth, while U.S. Industrial Services, U.S. Mechanical Construction and to a lesser extent, EMCOR U.K. are each reporting declines in operating income quarter-over-quarter. Total intangible asset amortization expense for the quarter is $8.6 million, which is greater than quarter 3 2012 by $1.2 million. Our U.S. Electrical Construction Services segment operating income increased $1.8 million or 8.2% over quarter 3 2012 with an operating margin of 7% or 10 basis points greater than last year's 6.9% operating margin. The increase in operating income in absolute dollars is due to higher volumes, while the increase in margin can be attributed to mix. 2013's third quarter U.S. Mechanical Construction Services segment operating margin of 4.4% represents a $2.9 million decrease from last year's quarter as a result of an additional $4.2 million of losses attributable to the 2 projects in the southeastern United States that we cited during our second quarter earnings call and that Tony mentioned just a few moments ago. Although not as significant as quarter 2, this quarter's negative impact from the referenced projects nonetheless masks that the Mechanical segment's Q3 operating margins would have exceeded 5% for the quarter. Our U.S. Building Services segment operating income increased $5.6 million or 31.6% over 2012's third quarter with a quarterly operating margin of 5.1%. The Mechanical Services operations were able to offset the headwinds experienced within our government and commercial site-based services divisions that comprise the remainder of this segment. U.S. Industrial Services is reporting a $10.8 million decrease in operating income quarter-over-quarter with the corresponding margin slightly better than breakeven. The most significant factor behind this quarter's performance is the tough comparable to 2012's third quarter due to 3 large nonrecurring turnaround and repair projects not being replicated in 2013, as well as our RepconStrickland acquisition getting a slower start than anticipated and generating a small operating loss, inclusive of intangible asset amortization expense. Our U.K. segment generated positive income during the third quarter, which was an improvement over quarter 2, but nonetheless was slightly down from 2012's third quarter. With approximately $2.1 million of losses generated within their Engineering Construction division for the quarter, the 20-basis-point decline in operating margin quarter-over-quarter was not that severe. Our third quarter operating income included $2.5 million of restructuring expenses, of which $1.9 million is U.K.-related with the remainder occurring in several domestic subsidiaries. With the third quarter closing of the RepconStrickland acquisition, we incurred an incremental $4.7 million of transaction costs in addition to the $1.4 million reported during quarter 2. We are now on Slide 8. This table lays out those items impacting our third quarter and year-to-date results, which we believe should be excluded from EMCOR's reported operating income to provide better comparability. Each of these items have been addressed in today's earlier commentaries. And for the sake of completeness are as follows: transaction expenses related to the acquisition of RepconStrickland of $4,689,000; losses generated by EMCOR's U.K. Engineering Construction operations of approximately $2,057,000; and restructuring expenses of $1,865,000 pertaining to reductions in workforce, as well as costs associated with idled real estate as a result of our strategic change in the U.K. The effect of the aforementioned adjustments amounts to adjusted operating income of $62.7 million or 3.9% of revenues for the quarter ended September 30, 2013, as compared to $71.4 million or 4.6% of revenues for the corresponding 2012 period. With regard to the year-to-date period ended September 30, adjusted operating income for 2013 is $170.5 million or 3.6% of revenues as compared to $175.9 million or 3.8% of revenues in 2012. Our income tax provision for the quarter is reflected in a tax rate of 46.4%, which includes discrete items that negatively impacted the rate by approximately 560 basis points within the quarter. The most significant discrete tax item is the impact of the corporate tax rate reduction in the U.K., which results in a revaluation of our net deferred tax asset there. This reduction in the U.K. deferred tax asset is reflected as incremental income tax expense within our third quarter income tax provision. And my expectation is the rate for the full year will be closer to 40% than where we currently are today. Cash provided by operations for the third quarter was $120.3 million, which represents an improvement of $66.7 million over cash provided by operations during 2012's second quarter. For the 9-month period, cash provided by operations is $68 million compared to $43 million of cash provided by operating activities for the year-to-date 2012 period. Our September 30 cash balance is $444 million. Please turn to Slide 9. Additional key financial data on this slide not addressed during my highlight summary are as follows: quarter 3 gross profit of $206.3 million represents 12.7% of revenues, which has improved from the comparable 2012 quarter despite the impact of those losses disclosed within both our U.S. Mechanical and EMCOR U.K. segments. Our third quarter gross margin represents 100-basis-point improvement over quarter 2. Total restructuring costs were $2.5 million, and as previously discussed, the majority of this amount pertains to our United Kingdom activities. Diluted earnings per common share for the quarter was $0.39 compared to $0.59 per diluted share a year ago. On an adjusted basis reflecting the add back of transaction costs, the loss incurred within our U.K. construction and engineering operations and associated restructuring costs, our diluted earnings per share would be $0.48 per share for the quarter as compared to $0.62 per diluted share on 2012's third quarter. We are now on Slide 10. I will now discuss our results for the 9-month period ended September 30, 2013. Revenues were essentially flat at $4.7 billion for both year-to-date periods with strong revenue growth within our domestic Electrical Construction segment and Industrial Services segment, being muted by revenue declines within both our domestic Mechanical Construction and EMCOR U.K. segments. Revenues attributable to businesses acquired of $49.5 million positively impacted our U.S. Industrial Services and U.S. Mechanical Construction Services segments for the year-to-date periods. Excluding the aforementioned acquisition revenues, year-to-date revenues are down 0.6% organically through September 30, 2013. Year-to-date gross profit of $579 million is higher than the representative 2012 period by $1.1 million and flat on a margin basis at 12.2% of revenues despite negative project activity within EMCOR's U.K. construction operations and the U.S. Mechanical Construction segment previously referenced. SG&A expenses of $427.9 million represent 9% of revenues compared to 8.6% of revenues for the corresponding 2012 period. Approximately $6.1 million of transaction expenses and $8.7 million of incremental SG&A from businesses acquired are included in EMCOR's year-to-date results. Year-to-date operating income is $141.5 million or 3% of revenues, which represents a $29.6 million decrease over 2012's year-to-date performance. As previously disclosed on Slide 8, adjusted operating income reflecting the add back of transaction costs, the losses incurred within our U.K. construction and engineering operations and associated restructuring costs for both year-to-date periods would be $170.5 million for 2013, as compared to $175.9 million for 2012, which represents a 3.1% decrease year-over-year. Diluted earnings per common share were $1.14 for the 9 months ended September 30, 2013, compared to $1.48 per common share on the corresponding 2012 period. And on an adjusted basis reflecting the add back, and I know I sound like a broken record, of transaction expenses losses incurred by EMCOR's U.K. engineering construction operations, as well as the restructuring expenses, year-to-date diluted earnings per share for 2013 would be $1.46 as compared to $1.53 per share in 2012. Please turn to Slide 11. EMCOR's balance sheet remains sufficiently liquid as represented by cash in excess of $400 million, which is available to meet current working capital requirements, as well as for organic and strategic investment opportunities. The reduction in working capital from year-end 2012 levels is driven by our lower cash balance as a result of monies used to fund our acquisition of RepconStrickland in late July, changes in goodwill and identifiable intangible assets between periods is due to the preliminary purchase price allocation of the aforementioned acquisition with identifiable intangible assets also impacted by the amortization expense recorded in 2013. Total debt has increased due borrowings to facilitate the RepconStrickland closing. However, our debt-to-capitalization ratio remains modest at approximately 22%. With those details out of the way, I would like to return the presentation to Tony. Tony?

Thanks, Mark, and I'm on Page 12. We have enhanced our backlog disclosure and now we report by segment, which we started with the Q2 2013 reporting. Total backlog at the end of third quarter stands at $3.39 billion, virtually flat with backlog as of September 2012. Our U.S. backlog is up $60 million year-over-year, and our U.K. backlog is down $46 million, and all of that's planned or 21% for the same time period. As already mentioned in the call, backlog in the U.K. continues to decline as we complete the planned withdrawal from the U.K. construction operations, which I'm sure everybody will be happy when we quit talking about that after 9 months of talking about it. Here in the States, U.S.-based construction backlog increased $208 million. That's what gives us -- starts to give us a little excitement here that maybe, maybe nonresidential construction might be showing early signs of coming back. We're close to 10% over the year-ago quarter with the Electrical segment up $298 million or 42% on the back of industrial and transportation projects, as well as a nice couple of commercial projects in the New York City area. As we know, Electrical is our most consistent performer over a long period of time. The Mechanical segment was down a little year-over-year, and this is nothing other than the normal ebb and flow of project work and contract awards, and you'd note that might be an okay thing considering the 2 aforementioned projects we discussed for both in backlog at this time last year. So that's basically what it's done year-over-year. Please note that 70% of our total backlog is really made up of these 2 segments, and these are the 2 segments when you really look at backlog, their earnings are driven from backlog in the future. There's some work that happens outside our backlog, where it's quick term work or more time and material, but our construction business is very much our backlog-driven businesses as you would expect. And most of that work is on a fixed-price basis. Backlog in our Building Services segment that, as previously stated, is made up of the Mobile Mechanical Services, Site-based Services, Government Service group. That's 22%. It is down $140 million. Let's be clear, we have gone through a pretty successful effort, and you see it in the margins. Calling work from backlog, that just doesn't make sense for us or that the customers have shifted on their expectations of what they want done, and our cost to serve became too high to make it economically feasible for us. That took about $100 million of backlog out, and you can argue the other $40 million is just the ebb and flow of the business as small project work comes in and out or government IDIQ work comes in and out or a slowness in the rewarding of contracts as we move to month-to-month on some of these contracts no longer have a full year's visibility on it. It's been a good outcome on margins for the long term. As we discussed, the newly broken out U.S. Industrial Service segment is comprised of Ohmstede, Redman and the newly acquired RepconStrickland. The only backlog that's really in this business is the shops business, and that part is really -- it had to be a significant major repair or complete rebuild with all new alloys and everything. But for the most part, that's the OEM part of the business, which if you'll remember is about 25% of what the original Ohmstede did. The rest of the work is either done on repairs or turnarounds. It's either done on a time and material basis or quota basis for repair, and it turns around so quick. It never is in backlog. RepconStrickland carry no backlog as we define it at EMCOR. I should note here that much of the work building services and industrial perform are really time and material work, small task work and backlog sometimes isn't the best representation of how that unit will perform in the current or ongoing period. With that, I'd ask you to move to Page 13, and we're going to talk about the sectors. Since December, backlog is up slightly. Institutional backlog ticked down for the quarter, which is really offset by transportation work, which we look as a real positive on a go-forward basis because a lot of that work requires really highly skilled people, especially on the electrical side, and there's not a whole lot of contractors that can do that. And we talked about this before, a lot of times you're competing on a budget. We have to get within the budget and make it all work, and that's good for us. In commercial, despite what we did year-over-year or even quarter-to-quarter in the commercial accounts business or site-based business, we're still up slightly, which you're starting to see, we hope, is a little sliver of hope there in commercial as it has sort of a steady pattern of moving up over the last 3 or 4 quarters and really over the last year. You can almost see the little purple sliver of hospitality. Really, that is a bit out work [ph] happening in some of the gaming sectors. It starting to get work for 50-50, what I would call, private work, commercial, industrial, hospitality and gaming and about 50% with non -- sort of private, which would be health care, institutional, water and wastewater, and transportation. Institutional is done for all the reasons we discussed not to mention what -- the most of which is also just the government really processing change orders and requests for adjustments in a really slow way. And I'm sure we're not the only people talking about that, and it's a very difficult environment, and certainly the shutdown didn't add to the speed of resolution on those issues. Now I'm going to be on Page 14 and 15, and let me talk about what everybody's probably been waiting for anyway, and you already know because we put out the press release. We're going to narrow our guidance down and bring both the top and low end down. On a pro forma basis, that's $2.10 to $2.25 on a pro forma share basis. We expect about $6.45 billion in revenues. We stated at the beginning of the year that achieving the top end of the range would be probably based on the pace and timing of recovery in the nonresidential sector. For the most part, although we did see some U.S. backlog growth here year-over-year and quarter-to-quarter, but for the most part, we've had a muted-to-even decline in nonresidential market this year. We have fought through that, but let's be clear, we have not met or exceeded our top line growth expectations for the year. When adjusting for the U.K. closure, which is the way I like to look at it because that is an intended consequence now, our organic growth rate year-to-date is sub 2% versus the 2.5% in our initial guidance. So we didn't get the acceleration of growth, and then let's be clear, the sequester hurt us more than we thought it was going to, to the tune of $0.10 to $0.15, and that'll resolve itself whether it's $0.10 or $0.15 as we move through the year. And really you could say that delta is why we thought we needed to bring the bottom end of the range down because sitting here today, we don't know everything we will resolve by the end of the year. We also -- RepconStrickland, we didn't plan on making a lot of money in the third quarter, but we thought we'd make a couple of pennies a share. Third quarter is always difficult. It's important to look at the year-to-date performance of that business, and you'll see that the industrial sector is up nice. But the bottom line is we expected a couple of pennies. That didn't happen. The fourth quarter outlook changed a little bit, but some things got pushed to first quarter, which outlook there looks good. These are customer-specific things. The customer shift work around here by 30 to 60 to 90 days at times. Sometimes they'll move it from one turnaround season to the other. We've talked about that before. All the fundamentals are still in place for the refining and downstream market to be a very good market for us for the long term. The outlook for industrial remains strong, like I said, going to '14. We expect our backlog to continue to grow. It's going to be in a sawtooth pattern. We do feel good about certain markets right now. Commercial's got some rebound to it. Health care, a little bit and maybe some transportation work that we've been negotiating for a while. The bottom line is absent a significant external shock, what we try to do is say let's not just depend on the market after we've got to this level of earnings. Let's take the actions here in '13 that will position us well for '14 and beyond. We believe we've done that. We believe there are glimmers in the nonresidential market that tells [indiscernible] better. Part of what you're seeing in the Building Services segment is really leveraged work we call it or repair work coming back, small task work. We hope that's the sign of a trend that maybe there's pent-up demand and those that know me know I don't speak a lot about that, but maybe pent-up demand is starting to break free. So we're fairly upbeat about where we can be. Like you, we knew we had a tough compare in this quarter, but we could have done a little better than we did. And we talked about the reasons, both some of our own doing and some externally driven. And with that, Christie, I'll take questions.

[Operator Instructions] Your first question comes from the line of Adam Thalhimer with BB&T Capital Markets. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Yes, Tony what would be your early thoughts on 2014? I mean, very broad strokes, is it a growth year for you?

Well, I mean, I think you've got to put it in 2 piles. We've done enough here in '13 that it should be a growth in earnings, right? I mean, I'm not going to -- we've made a significant acquisition. We're starting to see the improvement in our Building Services segment. We feel good about some of the long-term projects we've been working on to get to the contract stage in construction. So unless the nonres market completely rolls negative, 2014 should be a growth year for us. And then if you take the U.K. closure being behind us and what that could mean in the underlying numbers, even if you do all these add backs, we have a pretty good services business over there and we'll get the leverage on SG&A then with just a little bit of growth. We certainly aren't adding a lot of cost outside of the acquisition in the deal cost. So it'd be hard for us to say right now that we don't expect a growth year, some top line and probably more pronounced on the bottom line. Adam R. Thalhimer - BB&T Capital Markets, Research Division: That's encouraging. And then I haven't followed you guys for a while now, I mean, you in particular. I mean, maybe I'm reading something into it that's not there, but I mean it sounds like you're more positive than you kind of ever have been on a private nonres recovery.

I'm positive for a couple of reasons. I don't know where the nonres recovery is going to be, but I certainly know it's not going to be 0 to 1% much longer. And I get to see that from a number of different sources from distribution through OEMs and other places. The second thing is I really like the kind of capabilities we have in the company. Adding our capability and to serve the petrochemical and refining market is good for our company long term. Starting to see the merits of a building this Building Services sector over 8 or 10 years and starting to get to the performance levels we're starting to expect is good. And really, as upset as I am about those 2 projects in mechanical, I can bifurcate those projects for you. One of them is just a tough nasty job with a tough nasty client on a DOE side, and that's what it is. And we've been very conservative in recovery. I'm guessing we're going to do a little better some day than we're currently projecting, but we thought the best interest to be conservative because of the slowness in government decision-making right now. On the other job, we don't lose $9 million a job on EMCOR typically. I think we've done that in my 9 years, as of today, I think we've done that 2 or 3 times since I've been here, and one of them or 2 of them were overseas. So when I think about that, our Construction business underlying is performing very well, and seeing the backlog growth in electrical is a really good thing. So I am -- I hope I'm known as a fairly pragmatic person, but I like the things we've done in '13 to position ourselves for '14 and beyond. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Okay. And then last one for me, I'm just -- so I think when we thought about Repcon last quarter, we were thinking kind of $0.10 in the back half of the year, $0.30 next year. What's the thought process today? I mean, the turnaround season looks good for next spring.

Yes -- no, I mean, we never gave guidance on '14, but, yes, we thought $0.10. Quite frankly, the difference between $0.05 and $0.10 is a little more cost as we integrate things on the ground. That might be a $0.01, $0.015. And quite frankly, if you have a turnaround because of a plan of changing hands that gets pushed into 2014, it doesn't take a lot of revenue to go from expecting to make a couple of million dollars in the quarter to being a little bit below breakeven on RepconStrickland. I would tell you some of the fundamentals look very good. Our Welding Services business looks very strong, and the underlying RepconStrickland businesses look good going into '14. Of course, Ohmstede continues to be strong. I don't want to forget those guys, you know that. They're sort of the foundation of building our presence there.

Your next question is from the line of Nick Coppola with Thompson Research Group.

So the Facilities segment split certainly shows a real improvement in Building Services from a margin perspective. Can you talk a little bit more about contributors there? And obviously, Government Services was a headwind. So the Mobile Mechanical and Site-based really overcame that, and you're talking about kind of pent-up demands. Can you kind of expand on that a little bit for us?

Sure, and I'll ask Mark to comment or Kevin, if they so please. Big picture if you look year-to-date, which I'd like to start there, because there's a substantial performance there year-to-date as we get close to 4% margins. We're starting to see our site-based business really start to come together. We had a midsized to small legacy business, so when we added USM to it, let's be clear, the integration was rough at the beginning. We're starting to see how that all works together, and it's working. And you're seeing that both through customer retention, some new awards, and you're seeing that through gaining greater share with the customer. And that's really through leverage work. And that's where you start to see the pent-up demand. Customers are trusting us more now to do that leverage work, where they're doing more leverage work, and we think it's a combination of both. You go to the Mechanical business, and this is an interesting thing. Degree cooling days, which are how many hot days you've had that call for air conditioning, and that's a combination of humidity and ambient versus temperature are actually down this year. So it's not been a weather-driven event because that's what you always have to ask when you see it's been a repair-driven event. It's been an improvement in our underlying small project work margins on less volume in the small projects, and it's been an improvement in our service agreements. And you put the 3 together, you get to a good place. On the Government Services side, even though they have less volume, these guys are in a lot of ways are like running a good option offense, right? They grind it out for 3 yards and they bust the big 16-, 20-, 50-yard play. They're still grinding out to 3 to 5 yards. And because of the lack of project work in IDIQ work, they can't bust to long play this year. So their profitability is down, but they continue to be profitable and helpful. Mark?

Nick, the only thing I would add to Tony's commentary is with regards to the Commercial business. Yes, we've spent a number of quarters talking about how we reshaped our project portfolio or our customer portfolio. And you really started to see the benefit of that in the margin in 2013. Certainly, we like to be able to provide solutions to all of our customers, but to be quite honest with you, sometimes the economic arrangements aren't where they needed to be, and we've made sure that we've gotten ourselves out of those arrangements where it made sense and you're starting to see the benefit of that in the underlying margins reported in the current year.

Okay, that's helpful. And then kind of switching gears to the industrial side of the business. And kind of qualitatively, what are you hearing from customers about fall turnarounds through October and then what your expectations are for the spring?

The way I look at the businesses, I start with what does labor availability look like and can you get the skilled craftsman you need to be successful? Labor's clearly getting tighter in the Gulf Coast. And for a company like EMCOR U.S. Industrial Services, that is a good thing. And the reason that's a good thing, it means because we are an employer of choice for a number of reasons. Primarily, they're pretty sure they're going to get paid. They're going to be trained, and they're going to be safe. And they're going to be run by people that know what they're doing. That's a big deal when you're a skilled tradesman. That availability is compressing, so it means the better contractors are going to get to work. When the better contractors to get to work, that should be good because wage rates will go up, but then we will benefit from that through the markups. I mean, leverage goes both ways here, and that's a positive thing. Our customers are smart enough to know they want the best craft on the job to do the toughest jobs. And we will have them. We have the most skilled project managers. What's interesting when you think about how the folks now approach a turnaround season, they no longer -- yes, they're not on a quarterly basis for the most part, right? They will shift always, but they sort of look at the turnaround season now between October and April and late September to April and they think about how they need to mix crews and what they're going to take units down, what becomes an increased scope, what becomes a reduced scope. If you take that total time horizon, the season looks very strong. It's difficult to get clarity on what gets done in fourth quarter versus what gets done in first quarter, what gets done in first quarter, what may slip to April now because everybody's aware there's only so many guys that can do this work and so many engineers that can help design this work, and people are really starting to think about how you get the best crews out there. Does that make sense to you?

Your next question is from the line of Noelle Dilts with Stifel. Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division: My first question, you alluded to seeing a little bit more cost associated with the integration of Repcon. So I was hoping you could just go into a bit more detail there on how the integration is progressing where you're seeing a few more challenges than you originally anticipated. And then can you just talk about -- just touch on who's running the company if there have been any changes there and just kind of give us an update.

So we feel good about the management today as we did through due diligence, as we did over the 70 days so we've owned it. When I talk about costs, it has to do with getting the productivity and labor and not having unabsorbed time. We've had very little cost associated with moving people out of the business or restructuring. It has to do with -- we, EMCOR and Repcon, we had to get to a little clearer on how much labor we want to hold power for in the off-season. And that's not a big number, but we're pretty productive with our labor as they were. We might just be a little more productive without labor. As far as management, they're there for the long term. The team that runs the overall business was the team that we are very happy to have as part -- as our teammates, that ran Ohmstede originally. And that's now the group in charge of the whole segment for EMCOR. Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And then going back to your comments on the length of the turnaround season going from now from October to April, can you just kind of remind us of how you're thinking about the seasonality of the Repcon business, and then also if you can touch on when you start getting some visibility into orders translating into work kind of how far had you start to get some visibility for that business.

I'll cover the orders part of it and I'll let Mark go to seasonality.

Yes, Noelle, with regards to the seasonality and obviously, we saw this during the ownership period of Ohmstede, which we acquired in late 2007. Unfortunately, the majority of the revenues and profits are generated in quarter 4 and quarter 1 of each year. And as Tony just indicated, sometimes things slide between those 2 quarters. But if you look at that 6-month window for sake of discussion is where the majority of the turnaround activity is happening. We were fortunate in 2012 that we had a significant amount of work that actually came back into quarter 3, really late quarter 2 or early quarter 3 that did not replicate itself this year, and I'll let Tony speak to the visibility of those arrangements.

I mean, the way it works, Noelle, for a significant turnaround and more than a couple of million dollars or more than having 100 or so folks on the job is you'll start planning with those customers. Although they won't promise you the work. You'll start planning with them anywhere from 12 to 18 months ahead of time. And you have planners on the ground, and they're paying for those planners really on a cost plus basis, you're not making much on them. Your hope is if you get your planners on the ground that you're going to be the one doing the turnaround. In most cases, that is true and not 100% true. And then somewhere 60 to 90 days out, things start to firm up on what scope may look like or not look like. And then they start to try to figure out what kind of crew you're going to be able to marshal to get on the site. It really firms up somewhere between 30 and 60 days as formal contractual. Although about 90 to 120, we have a pretty good idea we're going to do it. So 30 to 60 goes to form of contraction. Contraction here means for this scope of work, here's what you're going to charge me on a task, or on a dollars per hour, here is what you're going to charge me for tools and all the overhead associated with it. And here's what the markup on that will be. Now the reality of doing this kind of work, and it's not a lot different from even doing some of the smaller mechanical work we do or the work we do in the process plants. You don't know exactly what you're going to find until you open it up. So scope we either expand or contract, a lot of times expands and sometimes contracts based on what you -- what happens when you open the unit. You may find that the heat exchanger, in fact, wasn't that plugged then you can clean it and get it back in operation and put it back together with minimal repairs. And it goes and everybody's good. You may find that the shell inside the unit was in pretty good shape, and so you don't have to do the extensive welding that you thought you would need to do to rebuild it or you may find the opposite. And so you have to be able to flex your workforce up and down. So when we think about some of the strategic rationale for the acquisition is to have a greater pool of labor available to you to be able to flex up and down and to move them between turnarounds. And so much of this is customer-specific. You'll hear a lot of people say "Oh, it must be the market." You go back to when we struggled with it. We were back in early 2011, and some other folks were doing really well in first quarter. We didn't. We fundamentally didn't think anything was wrong with our business, but we know there was a couple turnarounds that got pushed out, a couple of scopes were reduced, a couple of assets changed hands and got our worked delay. Other people reported dynamite numbers in that quarter, and they were talking of how great the market was. We never said the market was bad. We said for the set of customers we had for that turnaround season, things didn't quite go as we thought they were going to. Conversely, you look at our first quarter this year and you look at Repcon's first quarter this year, which you can't see but we saw, it worked the other way. Other people were saying, "Oh, it was me. The market's terrible." The market wasn't terrible. The market was basically the same or better than it was in '11. We were on the right turnarounds and had the right mix of customers for that season. On balance, the market is pretty good, and the long-term fundamentals of the market are pretty good. Some people would say they're great as far as refining utilization over a long period of time, which is what actually will drive maintenance. What we've been forced to do over these last 3 or 4 years is learn how to be a lot more flexible as a contractor, and we have. And owning RepconStrickland only makes us more flexible. Does that make sense to you?

Your next question is from the line of Saagar Parikh of KeyBanc Capital.

My apologies. Actually, my call dropped earlier. So if I ask something that's been asked already, again, my apologies. So first off, we've been hearing from a lot of peers in the refinery space that turnaround projects, and I think you mentioned this to some degree also, but turnaround projects are not large anymore and coming all in one big size, but rather are being broken up our smaller end pieces and are being done over a wider time period. Does this take away any competitive advantage that you guys have as EMCOR has been a larger company? Does it give any additional advantage on the offset to small mom-and-pop shops? And if it does, how does EMCOR counter that?

Yes, I'm not sure that they've become that much smaller. Again, I go back to the mix of work. We see some fairly significant turnaround work coming, and large ones, and we see some small ones. We see the small ones that go into large ones. I think the reality is for a mom-and-pop, the barriers to entry continue to be quite substantial. You start with just the safety requirements and the insurance requirements to do this work. They're pretty significant. Then you go with the working capital requirements to do this work, right? For the most part, the way you do turnaround work is you don't get big mobilization like you would on a construction project or some other big time immaterial jobs you may do like in a nuclear world. In the turnaround road, you pay the guys, and then you wait for your money. And then for a mom-and-pop, you take the combination of liquidity, coupled with safety, coupled with insurance, not to mention technical resources and technical ability. There are always going to be around pieces of it. Are they going to do the higher end work like the LP LP [ph] work, the heat exchanger extraction, which could be very difficult or the cat cracker lift or the highly skilled turnaround welding guys on the alloy? Yes, they may have 5 or 6 guys. Well we'll have 200 or 300 guys sometimes. So that's not the issue I think what refiners have learned to do over the last 3 to 5 years is they've learned to buy options, right? So what they want to do is try to keep their units up as much as they can. You have more refining-only-focused companies. They understand the business. You've seen assets change hands that way. I think the long term, that plays into the ability of larger contractors with great local execution that have the ability to get things back into the shop and get it fixed, and that's EMCOR.

And then a follow-up. Looking at your guidance and looking at the midpoint of what you have now to what you guys had originally projected at the beginning of the year then taking into account $0.10 in additional EPS contribution from Repcon and then taking to account the 20-or-so cents in potential losses in your Mechanical business from those 2 projects, the midpoint is actually looking pretty good for -- when you take all that into account. And so with that -- I know we've gone over a lot of negatives on this call in terms of maybe what's gone wrong. But in terms of positives, what in your operations has happened positively and looking at it now versus what you originally thought at the beginning of the year.

I think the margin execution underlying in our business year-to-date broad-based has been better than we thought it was going to be at full stop. Even in the Construction business, you take out that there's $20 million of losses, and one of them absolutely, like I said, I think we've beat ourselves up pretty good on the industrial, but we do the right thing by our clients at EMCOR and don't sit there and debate things. We got it done. It was a private client, we got it done. And we had the resources to bear to get it done. Very few people could have done that. But I switched to the other one that cause the losses, we'll see what happens on that chapter. We've been very conservative in how we view it because we had to be. We'll see where that turns out. Reality is we're not entirely being treated fair on that job site, and that'll have a different outcome some day hopefully. So if I correct for that and add back $15 million or so in the mechanical, margins are pretty good there. And look, all that work we won there were won in this slow growth recessionary environment to perceive the slow growth environment. In Electrical, yes, these guys are doing phenomenal in a very tough market and are doing phenomenal across all the sectors. And that's the benefit of long-term discipline and scale. That doesn't mean you're never going to have another hiccup. It means that we haven't had any. And when we do, we get after it right away. In building services we're doing a little better than we thought we would. We thought we'd do well. We thought we had started to put the right planks in place and the team on the ground in site; they said enough. We're getting this in the right direction. Mechanical service guys really called their portfolio. So when you put all that together, yes, there are more positives. But you know what? The numbers are what they are when they print, and we're disappointed after bringing the low end of the range, but we just can't overcome the increased impact of sequester.

And finally, last question for me. ECS, you mentioned backlog is up 10% year-over-year domestically. And I apologize if you talked about this already, but in terms of pricing, are we seeing any improvement in the pricing environment there, 100 basis points, anything?

Well I don't know if that's large. I think you're seeing -- again, let's go back. It's definitely better than 9%, definitely better than 10%. We actually think end of '11 to mid-'12 was a little bit of a step back for the markets. We were real careful with the kind of work we took. We think it's a little bit better from there, and we continue to work on productivity so that we can do what you're seeing in Electrical and Mechanical outside of those -- that job or 2 to deliver the margins that we need to and use prices upside.

Your next question from the line of John Rogers with D.A. Davidson. John B. Rogers - D.A. Davidson & Co., Research Division: Couple of things. First of all, in terms of just timing of a nonres recovery, Tony, I mean, I know we're all hopeful 2014 will be better, but even if it starts to get better early in the year, when do you really expect to see any benefits from that, late next year?

Well I think in certain sectors that are less dependent on a nonres recovery, we may see it a little earlier. As you get to things like transportation and some of the health care work is a little lumpier, so that may be a little less recovery. Commercial, I don't know. I mean, I think we've had a steady march upwards underlying if you correct for the $80 million to $100 million or so we've taken out of long-term contracts that just weren't working for us. So it sort of have been this gradual grind in commercial. I think it's a lot less lag than the other ones. It could be a -- yes, the other ones -- big infrastructure project may be a lag of 8 to 12 months. Commercialized, more like 3 to 6 months.

You don't -- you just don't to same lumpiness as you do.

Yes, it's more gradual and what we're seeing, John, and it's a positive and you can't quantify this yet, but you'll eventually, I think, see it in more awards and maybe better pricing. A lot of midsized guys aren't really around anymore.

There's plenty of competition, but we've hired some folks that had their own companies and now they basically are working for us as pretty significant project managers or division heads. We've seen a lot of deal flow there. Of course, we haven't done any of them. We have no reason to do that. And when you talk to the bonding guys, there's a lot less people there bonding today in the mid-market and plan on bonding than they did in the future. You put all that together a company like EMCOR can really benefit on the more complex work, whether it be commercial or institutional. John B. Rogers - D.A. Davidson & Co., Research Division: Okay. So if we do get an upturn early in '14, I mean, you could see the benefits.

Yes, absolutely. Absolutely. John B. Rogers - D.A. Davidson & Co., Research Division: And then you mentioned on -- in your earlier comments about targeting 5% margins in the Building Services. As you look at the mix of what you have now, Tony, what are -- what's reasonable margins for some of the other segments? I don't know if you want to go there.

Which parts, John? John B. Rogers - D.A. Davidson & Co., Research Division: Well, I guess, I mean, most important, I guess, the Industrial Services.

I know, I think, where are we, year-to-date, Mark? 7%...

7%, 9%.

7%, 9%. And what we clearly think that's between, yes, 7.5% and 10%. We would like to be closer to 10% on an operating income. We've got some early amortization that will -- some of it will wear off, but we're a high single-digit, low double-digit company. Parts of it are much more profitable, a little less profitable. Some of it -- but that would be the probably the most profitable thing we think we would do on a sustained basis. You can go to Building Services. We think we're well on our way there. We think we certainly hope to jump over 4% here soon on a trailing 12 months, and then we hope to jump over 4.2%, then 4.4%, then 4.5% and continue to get the mix right to get to 5% on a sustained basis. Construction, I think, for us to try and poor mouth it more [ph] and say we're a 3% to 4% contractor, that doesn't have any credibility because we've done it so well for so long. Now you know it's lumpy, but depending on the year, depending on the quarter, anywhere from 5% to 7%, depending on what we're doing. Some years, we're going to do little better, but we really don't see them unless we have extraordinary event like we had this year on those top of jobs. We don't plan on running our Construction businesses below 5%. Again, if you look at the assets in those business, which is you can do you can see that you can earn pretty good returns on those businesses when you get to those levels across the board. Of course, the Construction business run well. We really get a high return on net assets. John B. Rogers - D.A. Davidson & Co., Research Division: Okay. And then just last thing maybe for Mark, but there was -- it looks like there was a portion of the Facilities Services that got shifted up into the Mechanical Services segment. How big a business was that as I think about modeling out into 2014?

Yes. It's -- on a annual run rate, it's probably $70 million. Sometimes it can flex up a little bit bigger, but I'd say in the near term, $70 million is probably good number to use. John B. Rogers - D.A. Davidson & Co., Research Division: On an annualized basis?

Yes, on an annualized basis. John B. Rogers - D.A. Davidson & Co., Research Division: Okay. Oh, and Mark, you mentioned 40% tax rate this year, is that a good...

Yes, I'm hopeful we're going to get there. We're at 41.5% year-to-date. I think 40% is going to be the highest number it's going to be for the year. John B. Rogers - D.A. Davidson & Co., Research Division: Okay. So that's a pretty big decline in the fourth quarter.

Yes, absolutely.

And that's important for folks that follow us, right? That beat us up here a little bit in the third quarter. Unexpectedly, we don't control the government agencies do on taxes, right? And it was all positive what they did in the U.K. But if they ever did that in the U.S., we'd be thrilled. You guys could start writing about that, that would be terrific.

Your next question is from the line of Min Cho with FBR Capital Markets. Min Cho - FBR Capital Markets & Co., Research Division: Actually most of my questions have been answered. So just 2 quick ones here. Tony, in your commentary suggested that headcount might be down a little bit more in the fourth quarter. I was just checking to see if that's mostly tied to the U.K. Construction business or the other segments that you're looking to pare that down.

No, no, no. The other ones go based on the work. We have, in fact, start to tick up, we think, as the business continues to grow. In the fourth quarter, it'll go up because of the turnaround business. My headcount comments were specifically towards the U.K. We expect to be at the 90% reduction mark thereabouts by the end of the year. Min Cho - FBR Capital Markets & Co., Research Division: Okay. And then just finally, I know that you still have about $3.3 million in restructuring costs that are left for the rest of this year and maybe into 2014. Can you tell me how much of that is assumed in your EPS GAAP guidance for 2013?

The majority of it is assumed in the GAAP guidance for the year.

At this time, there are no further questions. Are there any closing remarks?

Thank you, all, very much for listening. I hope we answer the questions as it pertains to this quarter. And I think one of you all had it right. There's a lot underlying good things happening here. There's always a tough compare. We really look forward to talking to you all again on a collective basis in February when we give our 2014 guidance, and let's go out and perform. Thank you.

Ladies and gentlemen, this does conclude today's EMCOR third quarter earnings conference call. You may disconnect at this time.