EMCOR Group Inc (EME) 2011 Q3 法說會逐字稿

Good morning, my name is Ginger, and I will be your conference operator today. At this time I would like to welcome everyone to the EMCOR third quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remark, there will be a question and answer session. (Operator Instructions). Thank you, Ms. Alex Tramont, FTI Consulting, you may being your conference.

Thank you. Good morning everyone, and welcome to the EMCOR Group conference call, we are here to discuss the Company's 2011 third quarter results which were reported this morning. I would 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 Alex. Good morning everyone. Welcome to EMCOR Group's earnings conference call for the third quarter of 2011. For those of you who are accessing this call via theInternet and our website, welcome and we hope you have arrived at the beginning of the slide presentation that will accompany our remarks today. Please advance to slide two. Slide two shows the executives who are with me to discuss the quarter and nine months results. They are Tony Guzzi, our President and CEO, Mark Pompa, our Executive Vice President and CFO, Mava Heffler, Vice President of Marketing & Communications, and our Executive Vice President and General Council, Sheldon Cammaker. For call participants who are 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 get it 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's management 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 statement are no guarantee of future performance. Such risks and uncertainties but include but are not limited to, adverse effects of general economic conditions, changes in the political environment, changes in the specific market for EMCOR services, adverse business conditions, increased competition, risk of business, and risks associated with foreign operations. Certain other risks and factors associated with EMCOR's business are also discussed in the Company's 2010 Form 10-K, and in other filed from time-to-time with the Securities and Exchange Commission.

Before I turn the call over to Tony, as previously announced, the Company completed the sale of its Canadian subsidiary Comstock Canada in August 2011, this past August. Accordingly Comstock's results for the 2011 third quarter and all prior periods have been classified as discontinued operations.

And with that, let me please turn the call over to Tony. Tony?

Thanks, Kevin. Good morning and welcome to our call, and thanks for your interest in EMCOR. EMCOR reports pretty good results for the quarter, and they are in line with the higher end of our expectations on a year-to-date basis. EMCOR continues to have organic growth in the quarter of 9.6%. We now have six of the last seven quarters with a book to bill over 1. Our organic growth is coming in our services with industrial government and our legacy commercial site-based businesses all showing strong organic growth. We also have strong growth in our mechanical segment, both from organic and acquisition growth. We leave the quarter with $3.5 billion in backlog, up $660 million, or 23%. Most of the growth comes from acquisitions with a continued organic growth as reflected in our book to bill.

We continue excellent cost management as SG&A is at 8.9% of revenues versus 9.3% in Q3 2010. We had operating margins of 3.8% which when adjusted for the 2010 Q3 impairment charge compares to 4.8% a year ago. Again, our margins overall are in line with our previous guidance with construction margin a little better than they thought they would be, while facility margins are lagging compared to our expectations. Construction continues its excellent large product execution and labor productivity. Both our mechanical and electrical segments maintain a focused and disciplined approach to bidding and execution. Both matter.

We have benefited this year on a year-to-date period from excellent execution, as we finish a large hospitality job and several large healthcare jobs. These are large complex projects performed well. The integration of Bahnson Mechanicalis on track, and we like the markets that we gain access to through this acquisition.

In Facilities Service, we continue to gain more traction in industrial and recovering market. We continue to gain new customers in our site-based and mechanical services business, and our government business, and we are operating well in our core service business, and our repair service businesses. And we have had continued success in our government business. I will remind all that Q3 is typically our seasonally driven weakest quarter in our refinery services business. In government, we have completed the ramp-up of the large contract that was a drag through Q2 on our government margins. Our small project work shows some glimmer of improvement on backlog, but we continue to work off some backlog of projects, that lack the same upsell opportunity that we normally experience. Our integration of Harry Pepper is on track, and the company is performing to expectations.

Our USM integration is well underway. We have clear line of sight on at least 90% of the $5 million to $6 million in cost energies that we contemplated when we made the transaction. We operated USM at our expectations in the quarter, as we expected it to be breakeven on an EBITDA basis and it was. We do expect contribution in Q4 from USM. Q3 is the weakest quarter for USM, and so for planning purposes for the future, I just point that out.

Our UK business continues steady performance, as its mix shifts more to services and away from construction, and we continue to focus on execution and discipline in this business. As you know, we sold Comstock, and we show a gain of $0.13 a share for discontinued operations. I am going to let Mark cover that in detail on how that gain occurred.

On the balance sheet side, we are liquid and strong. With a debt to capital of 11%, and cash of $476 million. We also generated significant more cash on a year-to-date basis of almost $59 million, versus negative cash flow of $26 million for the same period a year ago. In Q3 we announced our first dividend of $0.05 a share on a quarterly basis, and also announced a buy-back of our own shares of up to $100 million. In summary, we made $0.47 per diluted share in Q3, and $1.24 per diluted share on a year-to-date basis.

We executed well in a continued tough and choppy market, and with that, I will turn it over to mark and I think he is going to take you to page five for the financials.

Thank you, Tony, and as Tony just stated, for those of you participating on the webcast, we are now on slide five. I will begin with this discussion of our third quarter 2011 results, before moving to year-to-date key financial data, which all information is derived from our consolidated financial statements which were included in both our earnings press release and our Form 10-Q filed earlier this morning.

Quarterly revenues of $1.48 billion in the quarter were up 21.5% from the third quarter 2010. Organic revenue growth in the quarter is 9.6%. And revenues attributable to businesses acquired of $145.4 million positively impact both our US mechanical construction services and our US facility services segments during Q3.

All reporting segments other than the US electrical construction services reported positive revenue growth during the quarter inclusive of acquisition contributions. Our US facilities services segment quarterly revenues increased 43%, of which approximately 18.8% is organic. SG&A expenses increased $18.5 million within the quarter, inclusive of $12.8 million of incremental SG&A from those business acquisitions completed subsequent to September 30, 2010. As a percentage of revenues, SG&A in the Q3 is 8.9%, compared to 9.3% in Q3 2010, as Tony previously mentioned.

Operating income of $56.5 million represents 3.81% of revenues, and is approximately 30 basis points higher on a sequential basis than our 2011 Q2 performance. Please note that 2010 third quarter was negatively impacted by a $226.2 million pretax noncash impairment charge due to the change in fair values of certain trade names and goodwill within our US affiliate services segment. 2010 Q3 operating market including the pretax noncash impairment charge previously referenced is 4.75%.

Our income tax provision for the quarter is reflected at a tax rate of 39.4%, which is greater than the 2010 Q3 rate due to the impairment loss recognized last year. The third quarter tax rate was higher than anticipated, due to the revaluation of EMCOR UK net deferred tax assets, resulting from an inactive UK corporate tax rate reduction during the quarter. As a result of this change, and the disposal of our Canadian segment, we anticipate that our full year 2011 tax rate will approximate 39%.

We recorded income from discontinued operation in the quarter of $8.4 million related to our disposition of Comstock Canada in August. This reported income consists of two components. Canada's net loss for the July 1 through August 2 sale date period of approximately $600,000, as well as a gain on the sale of approximately $9 million. Themain driver of why this transaction resulted in a significant gain from our original estimates was due to the required elimination of cumulative foreign currency translation balances and stockholders equity as a result of our liquidation of this foreign investment.

Cash provided by operations for the third quarter was $53.6 million, which represents an improvement over the $44.4 million of cash provided by operations during 2010's third quarter. For the nine-month period operating cash flow was $58.7 million, compared to a negative $29.7 million in 2010. Please note that the year-to-date 2010 period included a supplemental funding contribution to our UK defined benefit plan of $29.5 million.

Please turn to slide six. Additional key financial data on this slide not addressed during my highlights summary are as follows, Q3 gross profit of $188.3 million represents 12.7% of revenues, which is $16.8 million higher than the comparable 2010 quarter. On a gross margin basis, our current quarter is lower than 2010 margins by 140 basis points, due to a challenging pricing environment particularly with small project works, as well as the lower gross profit attributes of our current project mix, which is more weighted towards the public sector. Q3 2011 gross margins were consistent with our second quarter 2011 performance.

Our $18.5 million quarterly increase in SG&A expenses is inclusive of incremental SG&A, including intangible amortization related to businesses acquired, as previously mentioned. On an organic basis, SG&A expenses increased $5.6 million quarter-over-quarter, however as a percentage of revenues, quarterly SG&A represents a 40 basis point reduction from 2010 Q3 levels. Diluted income per common share from continuing operation for the quarter is $0.47, compared to a $2.60 loss per diluted share a year ago. On an adjusted basis reflecting the add back of a loss, 2010 impairment loss, 2010 diluted earnings per common share from continuing operations for the quarter would have been $0.49.

We are now on slide seven. I will now discuss the results of nine-month period ending September 30, 2011. Revenues increased 15.3% to $4.1 billion, with all reporting segments generating higher revenues in the year-to-date period. Consolidated organic revenue growth in the nine months is 7.2%. Consistent with our quarterly trends our US facility services revenues increased 31% in the period of which 17.6% was organic. Our commercial mechanical industrial and energy services divisions within this segment all experienced organic revenue growth for the first nine months of 2011, as well as our US electrical construction and United Kingdom segments.

Year-to-date gross profit is $519.6 million, which is higher than the representative year ago period, and is 12.7% of revenues. Consistent with the quarter's results gross profit margins on a comparative basis are down period-over-period due to project mix and a competitive pricing environment. Additionally as referenced last quarter, 2010 year-to-date gross profit was favorably impacted by a $4.5 million gain associated with our disposition of a joint venture investment.

SG&A expenses of $370.2 million represent 9% of revenues compared to 9.7% of revenues for the corresponding 2010 period, and as previously mentioned, the absolute increase in SG&A expense levels is due to incremental SG&A from businesses acquired, as well as $4.6 million of transaction costs incurred in connection with our USM acquisition. On an organic basis excluding the aforementioned transaction clause, SG&A funding levels are down year-over-year.

Year-to-date operating income is $148.4 million, or 3.62% of revenues. Adjusted for transaction costs incurred to-date, operating income as a percentage of revenues through September 2011 would be 3.74%, or $153 million. This compares favorably to 2010's year-to-date reporting operating loss of $97.3 million, as well as an adjusted basis after the add back of 2010's impairment losses, resulting in adjusted operating income for the nine months ending September 30 2010 of $148.8 million.

Diluted earnings per common share from continuing operations were $1.24 for the nine months ending September 30 2011, compared to a $1.92 diluted loss per common share, in the corresponding 2010 period. On an adjusted basis reflecting the add back of transactions costs incurred with in connection with our acquisition of USM, year-to-date diluted earnings per share would have been $1.29 per share.

We are now on slide eight. Our balance sheet remains strong with sufficient liquidity as represented by $476 million of cash, to meet current working capital requirements, as well as for all strategic investment opportunities. Changes in goodwill and identifiable tangible assets are due to recent acquisition activity, with both USM and Bahnson closing in the current year, as we continue towards finalization of our preliminary purchase price allocations. Total debt is essentially unchanged since the end of last year. And as Tony indicated, our debt to cap ratio remains low at just under 11%. EMCOR is continuing to manage risks within a difficult environment, and it is clearly reflected in our balance sheet. With that out of the way, I would like to return the presentation to Tony. Tony it is all yours.

Thanks, Mark. Ask everybody to go to page nine. We will talk about backlog. As we begin our discussion of Q3 backlog, I should remind everybody that Comstock Canadian operations is removed from this, and for all historical periods. Aggregate for Comstock is $250 million, and was concentrated in healthcare, industrial, and some institutional. As of September 30 EMCOR's backlog was at $3.54 billion,level with June 30th, giving us another book to bill of 1.

Backlog is hanging in there, as we continue to bounce along at the bottom. And in fact this is the sixth of seven quarters that this book to bill ratio has been greater than 1. In gross terms, backlog is $661 million, or 23% higher than it was a year ago in September 2010. And that is not a bad place to be, considering we have had a dramatic decline in our hospitality over the last couple of years, and had really no significant commercial opportunities. Organic backlog did increaseabout a percent over the year ago period.

Even with the prolonged economic, what I would call lack of conviction in our customers, our companies have been able to secure work that while not at prerecession margins, our levels that are substantially higher than at any prior comparable period in a recessionary environment for EMCOR, or any of our competitors for that matter. And given the overall unemployment levels that has been maintained in the trades and the construction sector, and you hear it every day, we have been able to find good work and execute it well, it speaks well to the execution ability of our folks, both in the services end, and in the construction end. In a lot of ways you could say the mechanical and electrical segments of our business, have really weathered a really tough storm, and continue to do so very well.

When you look at the bar chart for Q3, it is hard not to note the increase in commercial. It is a bellwether with what may be going on with private spending. It is the gold section of the bar. Commercial work now stands at over $900 million. An increase of just over $500 million from September 2010. Remember we bought USM at the end of second quarter, and that has some contribution.

Organic backlog is at $651 million versus $410 million a year ago, an increase of close to 60%. This is positive. But let's remember that the other major part of private spending that we look at, one of three, I always call them the 3.5, commercial, hospitality, industrial, and a chunk of healthcare, hospitality is dormant. Graphically you can see the ebb and flow of the hospitality work, and in my opinion, hospitality is not likely to come back any time soon, and certainly not in 2012.

There continues to be demand from our industrial customers in refining power, plant, energy and process markets. And in fact our refining companies, they won a number of fabrication projects, and also have had good turnaround activity in the spring, and will likely have good turnaround activity in the fall. Crack spreads are in good territory for the integrated and the pure refiners, and utilization is just high enough that plant managers are starting to spend money. I am hopeful that this continues into 2012. And we know it will continue into forth quarter 2011.

Healthcare, the light green section is down due to both project execution,we finished some great projects and we will continue to win more. It does tend to be lumpy, and we continue to like healthcare, giving the aging US population new technologies and increased single bed demand, which is a part of the Privacy Act. There are good long-term markets. They will have some wobbles, maybe given the uncertainty of healthcare reform, however we remain bullish and have the capability to build these complex facilities about as good as anybody in the business.

The dark blue which is institutional, remains our largest sector with over $1 billion of work. And we have added to that with both the acquisition of Pepper and Bahnson. Both companies have continued to win work. With Bahnson receiving a substantial increase to a contract from the DOE for work at a nuclear remediation site. That being said, other EMCOR companies continue to win institutional projects across the country, with a large focus on higher ed and universities, where building is taking place across the country, as they seek to compete for the best students and the research dollars.

If you go back to Pepper, they do a lot of work for the government in the Core of Engineers and the Navy, and as you remember, we won a nice project there with a comprehensive Everglades restoration, and in fact, Pepper has been able to team up with our Dynalectric Florida operation to do some of that work. Transportation remains steady. We continue to win work at airports similar to what [Dyna] Miami has done, [Downey] Electrical System, and also what we're doing at the airport in Atlanta.

All-in-all I am pleased with the composite of our backlog, given the pace, position and uncertainty in the larger economy. Clearly we need some macro assistance to elevate our markets. However like last quarter we fill our markets to continually move in a generally upward pattern, sawtoothed, lacking conviction, but just good enough for us to perform.

With that, I would like you to turn to page ten, and we will wrap up the call. And giving guidance this year, we started at $5.3 billionto $5.5 billion in revenue, and a $1.45 to $1.85 in earnings per share. We tightened that guidance in the second quarter to around $5.5 billion in revenue, and $1.65 to $1.85 in earnings per share.

We stated back in Q1 and reiterated in our Q2 call that we had a number of factors that would determine where we would end up in that range. We said we had some things that were in our control, and that we had some things that were not in our control. Our execution and our external market factors beyond our control would determine where we ended up in that range. So let's go back through that.

In the areas we control, we have executed well in most of them. We needed to continue our success in large project execution, and specifically had to finish our hospitality work out with success. We are and did exert continued excellence in large project execution. We also said that we had to have bidding discipline and cost control, and we have had both. And you can see that in our SG&A drop from 9.3% of sales to 8.9%, and Mark's commentary on SG&A in a lot of ways you would say stunning, the sales are continuing to drive and absent acquisitions and some transaction costs on an organic basis is flat to down.

We are getting the leverage we expected. And we need more of that leverage. We need an expected performance in our historical site based, or our core facilities services business. Our government and our break fist mechanical services business to be pretty good. We got that, and the heat helped a little bit but not as much as last year. Because if you look at second and third quarter cooling degree days were actually down year-over-year. Third quarter about flat, up a little bit, second quarter down pretty significantly. We needed to execute well in our refining and industrial work, as demand started to come back into that market. We are getting the performance and execution, and we needed to attack that market as demand although not at peak levels started the return.

We needed very good execution on small project work and more importantly, some demand to start returning back to the market, so that we could continue to add value to our customers and upsell them. Although a little bit better, we are not seeing the results in our margins yet that we expect from our small project work, because EMCOR is exceptionally good at that work, when the conditions are right. All-in-all for the most part we are executing on the things we control in 2011 in a substantial manner. We are doing about what we can do with the things that we control.

There are some things beyond our control that are more mixed. One is we needed a better refining market for our services, and that looks a little better, and fourth quarter looks a little better that a year ago too, or significantly better than a year ago. We needed a return of a small project work, and I said we have some glimmers but that is not there yet. We need a broad-based resumption of demand for all our maintenance services,again better, far from robust. We need a better climate for private investment. You could say industrial is a little better, and we have done some things through acquisition over the last year to continue to expand our not only industrial and institutional work, so it is better for EMCOR, healthcare is okay. Yes, we are up substantially organically in commercial. But I like to tell the folks around here, let's remember where the base we are coming from. And we all know that the hospitality work is dead.

All-in-all, we feel that the market is good enough. In customer conviction, although not strong, and more reactionary than we would like is just good enough,to allow us to take the low end of the guidance range up to $1.75 per diluted share and we are going to keep the top end of that range at $1.85, and all of that is on page 11. The guidance is all in,Canada out. USM in, and it includes the deal and transaction costs. Revenue will remain at $5.5 billion for our guidance. We think we will jump at that level. And there may be a little upside if the trends continue.

And with that, I would be happy to take questions with the team here. I will turn it over to the operator, Ginger.

(Operator Instructions). Your first question comes from the line of Richard Paget from WJB Capital.

Good morning, guys. Tony, I guess in your wrap-up comments you are continue to be kind of a little bit mixed markets, and cautiously optimistic. But 9% organic growth is a pretty strong number. I mean just given the macro. Is that just reflective of coming off a lower base from last year? I mean how would you kind of qualify that a little bit?

I think it is a combination of a couple things, Richard. I think, yes, part of it especially in the industrial work is coming off a very low base of last year. I think the second thing is, we are starting to do more services for customers, and we are starting to win new customers. We always win new customers, but we are starting to see a little pickup in that, and expansion in customers has been one of the key things we have done. And we continue to win new work in our government services business.

And you put all that together and we had growth in our mechanical segment also organically. So those are the sort of factors that led to growth, had some growth in the UK, although some of that was FX related. But we are not getting the draw-through we should. We priced the work appropriately. Some of this is beginning the customer relationships. Which never start out at high levels, as you get into these longer term relationships. But I need to see the draw-through.

I need to continue to say the SG&A leverage, but one of the precursors to better margins in the services sector especially is you have got to see demand return. And I think we are starting to see some demand return. What I am having a hard time getting a handle on is everybody is I think, as I have listened to a lot of calls like you have, is are we getting to a period of sustained demand?

Because when you talk to customers, they are making decisions, and I have been doing parts of this for a while, and there is a difference between a customer making a decision because they have to make a decision, and a customer making a decision because they have conviction, and want to grow their business, and really expand operating margins. A lot of folks want to expand operating margins, but not a lot of people talking about growth in their business. So maybe that is one way to answer the question. We do feel good about the organic growth. And we like that we are winning in the market.

Okay. And then you touched a second on the UK, and I know FX plays into it, but it was pretty good growth, although margins were a little bit lower. Maybe you could elaborate on that?

No, I think the base business in the UK is actually performing pretty well. We continue to shift the mix more towards services, and I am cautiously optimistic that the UK will become a steady performer for EMCOR, as it really has been for the last year or so, 18 months to two years. We like the management team there. And we like the direction they are taking the business.

Okay. So you would call the margin I guess temporary for the quarter and back to more--?

Yes, absolutely.

Okay. Thanks, I will get back in the queue.

And your next question comes from the line of Alex Rygiel from FBR.

Good morning Tony and team.

Good morning Alex, how are you?

Very good. Two questions, first, Tony in the past you have talked, and Frank has talked about, EMCOR's ability to build backlog almost in any cycle, but more importantly is the profit margin implied in that backlog. Can you kind of update us on that as we stand here in the cycle, and possibly looking at slow and steady improvement in your opportunities? Where is the pricing or the profit margin in the cycle, and is it starting to improve?

Alex, when I look at where we are, and I think we hit it when we gave guidance at the beginning of the year, when we gave guidance of really expecting a margin decline in our business, and in fact it is happening when you look at it year-over-year. I think it is almost purely a function of mix, and the lack of buoyancy in the small project work, and that small project work is not only in the services segment. It is also in the construction segment. It is the sort of, I always call it is either when you are in a service operation, it is the incremental profit that drops straight through, because all the overhead has been absorbed by the other core operations, and when you are in the construction business, one can argue it is what pays the bills to allow us to go out and do the large projects. So it is sort of reversed.

That environment is marginally better than it was over the last couple of years,and only marginally better. Maybe it is because we have become more selective. We were selective already, and maybe we have even become more selective.

And I think the rest of it falls out pretty much like it is, although I think people realize there is a bottom, so you are not seeing some of the craziness, although you will see it on specific jobs. The higher end of the market you are competing on capability, and you are competing against budgets. And it is a much more constructive part of the market, and that is why you have seen us take larger jobs over the last couple of years, because it is somewhere where sophistication still matters, and you could argue the smaller end that should return as people have hired people that can't do the work, and they realize that after the last couple of years.

The part that is still fairly difficult is the, let's say the $5 million to $15 million projects. That continues to be a difficult place to be. It is not getting any worse. But we have not seen anything really get better there either. I think our operating performance, now you are almost three years into this, Alex, so yes, we have finished the remainder of our hospitality work. It is a small sliver of purple on our backlog slide, but when you really cut through it, we expect to continue to work through this mix and grind through this mix.

Clearly we would like to see more private investment dollars jump into the market, because that really allows us the opportunity to add value to our customers, not only on a small project basis but also on that mid project. I don't know if that answers your question, but we think when we got at the beginning of the year we tried to reflect in our guidance what we thought was going on in our backlog.

It is helpful. And secondly, your 2011 guidance implies that is the fourth quarter is going to be flattish relative to the third quarter. But yet in your commentary you did suggest that the third quarter is seasonally weakest for USM, third quarter is seasonally weakest for refining, and therefore the fourth quarter should be better for both. Traditionally EMCOR has finished stronger in the fourth quarter than the third quarter and sect quarter and first inquiries, even before refining and USM. Are you just be conservative, or is there a reason for the cautious outlook for the fourth quarter?

Well, first we have a range of a $1.75 to a $1.85 a share. And as you get to the top end of that range, I think some of the conservatism would start to away on what we think. We are a different business, Alex. As the year progressed this year and these larger projects, they don't lend themselves as much to the fourth quarter rush, that the mid-market and the smaller projects do.

And as we talked about in the second quarter call, we had pretty good success finishing off some hospitality work where the bulk of it was really there. I think it is just a pace in timing as we add more institutional work and more public sector work. Our folks have less ability to accelerate and do the things they may have done when there was more of a private sector market focus. So there is an element of caution to it, and we have to execute like heck on this industrial backlog we have, as we go into the fourth quarter.

Helpful. Great. Thank you very much.

And your next question comes from the line of Rick Wesolowski, Sidoti and Company.

Thank you, good morning everybody. Acquired revenue in your facilities business was $90 million, and if I assume $20 million or $25 million for Harry Pepper, that leaves $65 million or $70 million for USM. Am I underestimating the seasonality of this business? Does USM have quarters well above $100 million on a $375 million annual rate?

Well, I think you got the number about right on USM for the quarter. And again we got no really EPS from that, and didn't expect to, and broke even on an EBITDA basis, so you can see what it is doing to margins in that third quarter, as we just acquired it. I don't know if they are as high at $100 million, but somewhere near there.

Okay.

Mark?

I mean clearly as we move into the snow removal season, USM's revenues can markedly change and there is an element of seasonal snow that they do, but there is also an element of event-driven snow, and that is obviously all weather specific. But clearly as you move from quarter 3 to quarter 4 on a calendar basis, and from quarter 4 to quarter 1 next year, you are going to see revenue levels move commensurately with the winter season.

Okay. If I had taken out the acquired effect in your facilities service business, your operating margin was still about flat with the first half and as you had noted, you had underperformed your own expectations.

Yes.

Can you walk through the different par the your facilities business and compare how they performed versus the first half and the prospects for improvement for 2012?

What I would rather, what I will try to do here is talk about where they are versus our expectations, to because I think I can answer both questions, right? I think our government business is performing about where we expected. Our industrial business just needs more volume, but we are starting to see the drop-through that we need. We would like more volume as we get more volume, we will get more margin. I don't have enough of a view to talk about what I expect in 2012 there. But I do expect continued trends as we head into the fourth quarter. Our site-based business probably has a little bit of upside. This is preUSM. It is close to where we want it.

We would like a little more performance there, and our mechanical service business is really the part that is really dragging down the services segment. And it is really project driven. We had very good performance on both our service agreement base, and our repair service, and our controls business. The small project work is where we are really suffering, and it is where we get the biggest drop-through when it is going well.

Okay. Are those four roughly similar in terms of what they contribute to that segment? Or is there one that really overshadows the others?

Well, this is Mark, I think the issue is obviously the mechanical service business is much larger than the other components, and I think from a margin contribution basis, the industrial business has a margin profile that is in excess of all of those other businesses. So it is kind of a mix and match unfortunately.

Excellent. Appreciate it.

You are welcome.

And your next question comes from the line of Adam Thalhimer from BB&T Capital Markets.

Good morning guys. Have you bought back any stock over the past month?

The answer is yes. And we did a, we put the instrument in place that 10B51 that we needed to put in place to be able to do it during the quiet period. And we will disclose what we bought back when we do our 10-K.

Okay. Tony, USM, can you just remind us from a high level perspective what your strategy is there, and how does that strategy feel now that you have owned it for a few months now?

If you look at the strategy we have with USM, right, let's start with the customers in the market. The dispersed customer, the sort of retail customer, the branch banking business, the multi-site customer, it is a big customer base that has a lot of activity. We service that. We had a business that was similar. We do it through national accounts and mechanical service, and we had our own supplier management business that was focus on trades, and then we have a self-performed business, that does it with people in buildings, and then [route] technicians.

It is a business that we have improved pretty substantially over the last three years, but the market we were serving, rough numbers was about $110 billion, and we were known as the trades guys. We had more and more customers asking us to do, are you guys going to expand into these other services that are as important or more important to us than the stuff you do, the trades, the mechanical, the electrical, the plumbing, the fire protection. And we looked at doing organically and we it some tests on that. We didn't really want to get into large self-performance on the cleaning side. Or on the snow removal side. But these things are critical to those customers that we were serving.

By buying USM we were able to open up another $110 billion of market to us. So now we are serving a $220 billion market, and we are able to service customers in a more holistic way. We also thought when we did that we would be able to offer a more comprehensive solution to our customers. And be able to self-perform in areas, that had been subcontracted especially with route technicians or dedicated technicians, and also to outsource some of the things that we were maybe not doing as effectively because we didn't have the scale where USM was expert at it.

All of that is around the synergies. We clearly as I said, we have a clear line of sight on 90% of the $5 million to $6 million we saw. I guess I would answer how does it feel after owning it for a quarter? That is basically what it is. It is a little more than a quarter as of today. We have done a lot.

To do it, we have a new facility that was planned before we bought it. It is terrific for customers. It is terrific for our work environment. We were able to immediately do some process work. I mean we are clearly better at self-perform than the little bit that did they self-perform. It is something we do very well and they are better at sourcing than we were with some of the critical services our customers want. Some of that has proven to be true.

But I guess the rubber hit the road for me is when we had our Grand Opening of our new facility, and we had some of our largest customers there, and we had people that I knew over an 8 to 10-year period, people with people at EMCOR knew over an 8 to 10 year period, and clearly people at USM knew over an 8 to 10-year period. And when I have people that control budgets of $15 million to $30 million walk up to me and said, this is a terrific move for EMCOR, because the process discipline you have with the capabilities that USM has, and you put the two together, you will really be able to serve your customers better, and we talked about that and we had workshops with them that night.

So instead of it coming from me that it was validated by some significant customers, and some significant customers we hope to win, it starts to validate to me that the strategies in fact working. Now where we got to see it, we are going it see it on the cost side. We have got to see it in can be we grow this thing more substantially than where the markets is growing. Revenue synergies are always tough to get initially, and it is not going to happen overnight, so long term now when you look at strategically, we have a combination of a business that we are a substantial player in, and we have a base of business and a base of capabilities to attack the customers with, and serve them, that is much more robust and comprehensive, because we are serving twice the market that we were before.

Good. Thanks for that. And then last question for me on government spending. You said it is in line with your expectations. Now there is a lot of fear out there about what is going to happen to government spending. Do you think that fear is overblown?

I don't know if it is fear or hope. Depends where you are. I think in our case, I don't control federal budgets. I don't control state budgets. What we have seen and what we have tried real hard to do is diversify our customer base in the government business, so that we were not dependent on any one particular agency, service or any of the above, and we also wanted to make sure that we were doing things that were critical to what they do, maintaining facilities that we thought were long-term winners.

If you look at our contract awards and the kinds of things we have won, we have won a fair amount of healthcare work in the last couple years. I think all of us believe that is going to be more of a need instead of less of a need, especially with everybody coming home now. Iraq is winding down, Afghanistan will wind down. One thing we didn't do is we never bet, we never grew our business around what was going on with the wars. We grew our business on what was going on to support the ongoing function of the military, NASA, Department of Homeland Security.

So I don't know what will happen. I know that we are having a pretty good 2011 and with the share we have taken, we should have a pretty good 2012 in the government business, because I think we are doing things that in the long term should reduce government costs. What I am hopeful of is that government will go back to the mode which we had in the late 1990s, and really up until about two or three years ago, where they stopped doing things with government personnel that other people could do better. And we have seen a pretty sizable pullback in that in the last couple of years, and hopefully as budgets come under stress, that we will get back to that, and that could be an opportunity for EMCOR.

Okay, that is great. Thanks Tony.

And your next question comes from the line of John Rogers from DA Davidson.

Hi, good morning.

Good morning, John.

Tony, in terms of your backlog, the growth that you saw organic of about 1%, I am just trying to look at that relative to the organic growth you have seen in revenue, and I am curious as you look at your business now, is backlog a good indicator of what we are seeing out 12 months from now?

I think it is still a pretty good indicator, John. We have always had a portion of our business. I don't want to call it walk-in business, but as we get more towards services, less of that gets captured in a quarter and backlog number, especially as you get into the turnaround business, and the obvious business in the power plant area. That stuff never makes its way into backlog. It is a bill-as-you go-type service, even though you're contracted to do it. And you have a hot summer like we had in the third quarter, and you pick up repair service. Again that is not in backlog.

So I think it is still a fairly good predictor of what will be. Is it as predictive as it was seven or eight years ago? Maybe not that, but it is still within plus or minus 5% or 10% of that. So I think it is a good predictor. I think the thing we struggle with right now, John is looking at as a predictor is when you have a mix that is more private sector, you sort of have a view on how that is going to turn. Public sector work has a different pace and timing. And so as we finish the year, we will put a lot of work around figuring out what our revenue number is, and then our history is, we are fairly accurate on the revenue number and guidance that we give at EMCOR, and we will continue to try to do that.

And is the USM contracts, are they in backlog?

Yes, they are. It is about a little over $250 million. They are more service agreement based.

Right.

And more planned maintenance. Most of those are around cleaning. Mark talked about the seasonal snow , and then we have some trades contracts in there

And John, this is Mark once again. The only thing that is in backlog is within the next 12 months based on revenues.

It is the next 12 months, okay. And Mark, in terms of the depreciation and amortization numbers were a little bit higher at least than what I was seeing. Is that the right run right now at least over the next 12 months until we anniversary again?

Yes, obviously we were successful getting our SEC document today despite the XTRL tagging issues. But we included the full acquisition disclosure from the 10-K.

I'm sorry, I haven't --

That is fine. We scheduled that out actually what the amortization levels are for the remainder of this, as well as for the next five years.

Okay.

But the answer to your question, Yes, what we are running at for quarter 3 and quarter 4 is pretty steady state for the next 12 months, and USM is not like the other acquisitions we have made historically. There is a more uniform amortization expense associated with that business as opposed to some of our other businesses that are more backlog driven, where we have a spike in amortization in the early periods, and then it slows down. So if you take a look at that disclosure, you will see those numbers and you will see that you really don't see the significance drop-off in amortization levels until you get out to like 2014 or so.

Okay. Great. Thank you.

You are welcome.

And your next question comes from the line of David Wells from Thompson Research.

Good morning everybody.

Good evening, David.

If you look at what you are seeing in the services business, can you bucket out what your thoughts are on market share gains, versus maybe the pie growing, and I think one thing that we are seeing across a number of sectors is outsourcing continues to find its way into different line items of the budget, than perhaps had earlier in this cycle from an economic perspective. Is that some of the growth that you are seeing, or is this more competitive weakness from some of your competitors and you are picking up work that is there?

Outsourcing is always a hard thing to put your finger on, because how much is that driving? I think it's hard to draw broad trends until after it is over, right? So after the cycle is over, after we have had a three to five-year look at it we will know what actually happened. Here is what I would say. We are clearly gaining share in government services. I think in our refinery services business, we are expanding the scope of services, probably gaining a little share and becoming more embedded with some of our key customers.

In our mechanical services I think in some select markets we gained some share. Up in the Northeast, out in the West Coast. And I think the market is up a little bit. Again I think it depends on what you break out. I think in the large project area over the last three years, we have clearly gained share from versus what we have historically done. I would say in the mid-sized project right now, in the mechanical and electrical segments, we probably lost share. Because it has been brutally competitive and we have chosen not to play on some of those projects. So I think that is how it probably spills out overall, David.

Okay. That is really helpful. I appreciate that. If I look at the fourth quarter last year, Q3 to Q4 was significantly cash generative. Is there anything that would keep this fourth quarter from looking different to that, or should we expect a similar level of cash generation?

David, traditionally our fourth quarter is our strongest cash flow generation period. I don't see any reason why you are not going to see the same trend this year. I will caveat that with it might not be as drastic a change from quarter 3 to quarter 4 as we saw at the calendar 2010, but you definitely will see better operating cash flow performance in the fourth quarter 2011.

And one of the things we wrestle with is we have accelerating demand in some of our service offerings. As that happens in November and December, these are companies that like to hold on to their cash at the end year. And as you grow with those kind of customers,this is our first time with of the USM, and we are seeing a pretty strong resumption of demand in our industrial business so we will see where it comes out. We expect good cash flow generation in Q4 obviously.

Okay. So given the cash flow in Q3 and Q4, effectively you have kind of already covered the nut, if you will, from the repurchase perspective. I guess what are your thoughts on returning cash to shareholders and expanding I guess the repurchase, or with what you have decided to do, do you want to keep some cash available from an acquisitions perspective, and how has your thinking changed over the last, say two months with regards to that?

We tend to look longer than two months. If you look broader, David, right, EMCOR for the first time in its history made a long-term commitment to return cash to shareowners through a dividend,of a nickel a share. At the same time, EMCOR for the first significant time in its history put a repurchase program in place of up to $100 million. I think we would like to execute on that program first, and execute well on that to the benefit of our shareowners before we start worrying about the one on top of it.

We feel like there is some growth coming into the business especially on the services side. As Mark likes to say, we have a $200 million balance sheet requirement we like to keep. And remember part of that is in the UK. And so of course we tend to be opportunistic acquirers of things of scale, and of course we are always in the market for the private transactions. So short answer is, I think we have shown for the first time a commitment for continued return to shareowners of cash, and I think that we also believe at this time that our stock is a fair value, and is one of the best companies we can buy, and that is why we have the $100 million program in place today.

Sure. Absolutely. Great, thank you so much.

Your next question comes from Tahira Afzal from KeyBanc Capital Markets.

This is [Saagar Parikh] for Tahira. A lot of the questions have been answered, but based on the last question on the acquisitions and using your cash, you have made Harry Pepper, you have made Bahnson, you have made USM. Going forward if you were to look at acquisitions, what area of your business would you like to tack something onto?

We spent about $300 million in the past year. So we have been fairly active. And we like all three of the acquisitions we made in the past year. All of them complemented important parts of our business.

USM not only strengthened our commercial site-based business, it also strengthened our mechanical services business by presenting more opportunities for us to serve customers, especially with controls and repair service, and more importantly replacement jobs. Pepper reinforced our government business, and Bahnson opened new markets for our mechanical segment to attack. I think when we think about acquisitions, we think we have about five or six places that we would like to acquire, and we don't stray too much off of that.

We like the industrial market, we like the industrial market a lot. if you look over a number of years we have made acquisition there from PMI, which is in our mechanical segment, PPM which is in EMCOR's facilities services segment, Olmstead, Redman and now Bahnson, are all industrially focused, which builds on an industrial heritage we had at EMCOR. You look at USM, we know where that fits. So commercial site-based mechanical service. We would continue to buy mechanical service. We would like to be more in Texas, we would like to be more in the Pacific Northwest.

If you look at government, a little bit more difficulty acquisition to pull off. A lot of 8As and other things. We would like to buy some more capability there. Especially in the logistics area, and we will always look at mechanical and electrical contractors in our core segments, and we have shown that over time with fire protection, to way back when we brought the subsidiaries from Comfort Systems, and really brought us flagship companies, like [SAMHWA] and F&G. Acquisitions tend to be opportunistic. They tend to be after a lot of thought. There are very few things that we bought that we hadn't already thought of, and we have a list that we would like to attack, and sectors that we would like to attack, but you shouldn't expect to us venture much farther out from that.

Thanks, perfect. I know this has been touched on a little bit, but I am looking at your revenue guidance for the fourth quarter. It implies, if I am looking at it correctly, it implies negative organic growth for the fourth quarter based on your revenue estimate?

We could be a little light there, Saagar. We basically said that we know we are going to deliver at least $5.5 billion.

Perfect. Just wanted to make sure. Other than that, thanks for the call, guys.

Thank you.

And your next question comes from Avi Fisher from BMO Capital Markets.

Hi, good morning. Nice quarter, gentlemen. You called out on the call and also in the Q project completions in the US mechanical benefiting revenues and margins. Is that something we should see again in 4Q and we would normally do, or were there completions earlier than expected this year?

No, I mean it is just, we especially had a focus on, I probably could make that comment just about every third or fourth quarter for the next five years I would guess.

Okay. So expect it again?

Yes.

I am a little bit confused just on the backlog side. I think on the Q and in the comments you called out $640 million of acquired backlog. Last quarter I think it was about $520 million, so I am trying to understand what that incremental acquired backlog was?

Well, the acquired backlog is about $640 million split between, this is Kevin, split between Bahnson, Pepper and USM.

So this is backlog, but it increased to $120 million over last quarter. So is that just bookings--?

Last quarter was about $540 million, or something like that. It increased about $100 million I believe.

So these are bookings that these acquired businesses did over the quarter?

That is correct, yes.

They are kind of core bookings?

They would be core bookings. We keep track of them for a year that way, and then we will stop talking about them.

Got you. I appreciate that clarification.

A lot of people would say that incremental $100 million was organic.

Yes, I would agree. In the facility services business when you kind of back out the amortization, you get to about 1.6% acquired, margins on the acquired EBIT. It has been really lumpy since you made these acquisitions. And also lighter than I think we should expect on a run rate. So I am wondering when we should start to see the acquired EBIT margins that we expect?

Pepper has heavy amortization with it, so it is doing on an EBITDA basis, it is exactly where we thought it would be. And USM dragged us down big time in the third quarter, because you have got give or take $70 million of revenue, and no earnings. Because and we never expected any in third quarter, and I am not sure until we build it out its trades business more, that we will ever have great earnings in the third quarter. We have to add the product line to do that. And so you add that back and you sort of get a different picture on acquired, and from an EBITDA perspective, they are doing exactly what we thought they would do. That is the number we have to watch because we have very little control over the amortization number.

Okay. So at this point.

So I would say a year or so from now, Avi, as you look a year from now, and we have gone through another 12 months almost of Pepper's backlog, you will see a sizable pickup there. And like Mark said, USM will have characteristics that are a little different. He is finalizing those numbers now. It will be more flat, but you should see the contribution we should expect, as we get out of the snow season first quarter, get into the start-up season, and by third quarter next year we should be at a more normalized run rate.

Got you. Okay. Thank you. And Mark, you talked about a full rate tax rate of 39%. Any ideas of what we should be looking for just for next year?

Well, obviously depending on where we are going to generate our profits. Obviously with the Canadian business out of the mix, we almost become entirely a domestic company, and depending on what happens with federal rates which let's just presume right now they are going to hold for 2012, I still think you are going to see us trend somewhere around 38%, which is what we were anticipating for the current year. Obviously with the reduction in the UK rate is actually a positive factor. Unfortunately because of the deferred tax attributes, we ended up having to record additional expense in the quarter.

So once again, if the UK profitability attributes next year are better than they are this year, and we are hopeful that they will be, we might actually see an even more pronounced downward move in the rate. 38% is a safe starting point. We will talk more about it when we provide guidance for 2012, but it is not out of the realm of possibility that you might see the rate move down towards 37% for 2012.

Again, just one other quick question, your corporate G&A, I just look at the corporate and other has been about $13 million plus or minus for the first three quarters. I know 4Q typically has a pickup just on some conflict. Can you hold these levels on a dollar value basis?

Well, we are going to sure work to do it. The only thing that really takes it up from here, is we have incentive plans tied to the profitability of the Company, and if we could ever get strong earnings momentum back in the Company, maybe we will see it go up, but I think that would be positive for everybody. We are not planning on adding resources. We are probably going to add, tops one or two executives over the next year, one to give them maybe Mark a little bit of help on the operations side, and that is about it. We have people working real hard and our folks know this is a business that we have to keep corporate SG&A well below 1% of sales, and we would like it to be 20 or 30 basis points below is that.

Thanks very much, and nice quarter again.

Thank you.

There are no further questions at this time. Management, do you have any closing remarks?

Thanks, everybody. And I hope everybody has a great fourth quarter. We sure hope we have a good fourth quarter, and everybody be safe. Take care. Bye.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time you may now disconnect.