EMCOR Group Inc (EME) 2012 Q2 法說會逐字稿

Good morning. My name is Lashonna and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group's Second Quarter 2012 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

I would now like to turn the call over to Mr. Gordon McCoun of FTI Consulting. Sir, please go ahead.

Thank you, Lashonna, and good morning, everyone, and welcome to the EMCOR Group Conference Call. We're here to discuss the Company's 2012 second 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.

Thanks, Gordon, and good morning, everyone. Welcome to EMCOR's earnings conference call for the second quarter of 2012.

For those of you who are accessing the call via the internet and our website, welcome, and we hope you have arrived at the beginning of a slide presentation that will accompany our remarks today.

Please advance to Slide 2.

Slide 2 depicts the executives who are with me to discuss the quarter and 6-month results. They are Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, 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 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 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's management as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business conditions, increased competition, mix of business and risks associated with foreign operations. Certain other risks and factors associated with EMCOR's business are also discussed in the Company's 2011 Form 10-K and in other reports filed from time to time with the Securities and Exchange Commission.

With that said, please let me turn the call over to Tony. Tony?

Thanks, Kevin, and we should turn to Page 3 as that will be the basis for my initial discussion.

Our good start continues this year, and most of the year is unfolding as we discussed on our earlier earning calls.

We earned $0.49 per diluted share from continuing operations versus $0.42 per diluted share from continuing operations in the year-ago quarter.

Revenues continue to be very strong, as we had $1.59 billion in revenues versus $1.35 billion in revenues in last year's second quarter.

Growth was 18%, with half of that -- a little over half of that in organic growth.

We continue to gain cost leverage, as we expected, from our SG&A expenses, and we've talked about that repetitively. Our SG&A percentage dropped to 8.7% from 8.9% a year ago, after adjusting for the USM deal costs, and continues a trend that we have seen over the last several quarters as our organic growth is leveraged off our existing expense structure.

Operating income came in at 3.5% versus 4.0% a year ago, again after adjusting for the USM deal costs.

Cash flow was $24 million in the quarter versus $41 million a year ago, and again is about where we expected. As the business is growing, our net billings in excess of costs continues to reduce.

As you look at our individual segments, our electrical and mechanical segments continue their strong performance, and all the work we are executing now was (inaudible) recession or near-recessionary times.

Our facilities segment is improving, and our lines of business in facilities are about where we expected them to be, except for our site-based and USM businesses which really make up our commercial site-based business.

We've had several large start-ups in our legacy business and at USM, and profitability should improve from here. Our USM business is seasonally weak in the second quarter anyway, but forward indicators -- like backlog, bidding volumes, win rates, cost reduction and the cost synergies we've talked about -- are moving in the right direction. However, let's be clear. We are nowhere near where we want to be with this business, and that includes the combined site-based business, and we'll get it on track and we're about 12 months behind our expectations for this business.

In the mechanical services business and in our construction business, our small project margins are improving. And we really won't know the effects of the recent heat until we move through third quarter. Suffice it to say, we have pretty busy technicians out there, and for those customers that had an EMCOR service relationship, they were happy that we were able to answer their bell -- answer the bell for them in their time of need.

In our industrial business, our shop performance continues to be strong and our backlog continues to be strong.

In our industrial field business, we had a better second quarter than we did in the year-ago period, but we did not really have a good first half in our refinery services business for the field part of the business. Again, the shop part of the business was very good.

Government was steady and performed well.

The UK had a decent quarter for their mix, with very strong services performance that was somewhat offset by weaker construction performance.

Backlog dropped sequentially from the earlier period, reflecting both our strong organic growth and a planned reduction in our UK construction operations, and quite frankly, it's the nature of the work we're doing more as we do more fast-burning industrial work and also commercial work that's just closer to the customer.

Our book-to-bill bid dropped below 1 in the quarter, but we believe the business and the outlook remain on track.

Over the last 4 quarters, we've had strong organic growth with little to no backlog growth, and it speaks to the mix of work we are doing and the customers we are serving.

Overall, we had a good quarter -- a good first half on the books. Revenues are a little stronger than we expected, but everything else is pretty much on track with where we expected to the year and as the year started and the guidance we gave.

With that, I'll turn it over to Mark and he will cover the financials in detail.

Thank you, Tony, and good morning to everyone participating today. For those participating via the webcast, we are now on Slide 4.

I will begin with certain highlights of our second quarter 2012 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 $1.59 billion in the quarter are up 18% from 2011 second quarter. Organic revenue growth in the quarter is 9.4%, and all reporting segments -- other than our US electrical construction services segment -- reported positive revenue growth during the quarter just ended.

Revenues attributable to businesses acquired of $115.8 million positively impacted our US facility services and US mechanical construction services segments during Quarter 2. As previously mentioned, domestic electrical revenues did decrease 3.5%. Domestic mechanical construction quarterly revenues increased 27.5%, and our facility services quarterly revenues increased 23.1%, and our UK segment revenues increased 15.7%. Good revenue performance all the way around.

Selling, general and administrative expenses increased $13.2 million within the quarter, inclusive of $10.1 million of incremental SG&A from those acquisitions completed June 30 of last year to the current date. As a percentage of revenues, SG&A in Quarter 2 was 8.7% which represents a 50-basis-point reduction from last year's Quarter 2 percentage of 9.2%. And as Tony previously touched upon, I'd just like to remind everybody that our Quarter 2 2011's SG&A included $4.5 million of transaction costs pertaining to our acquisition of USM.

Please turn to Slide 5.

Operating income of $56.3 million represents 3.54% of revenues and compares to $50 million of operating income, or 3.71% of revenues, in 2011's second quarter. All reporting segments, other than US electrical construction, reported increases in operating income quarter over quarter.

Operating margins by reporting segment are as follows -- US electrical, 7.6% in Quarter 2 2012 versus 8.6% in Quarter 2 2011; US mechanical construction, 5% in Quarter 2 2012 versus 4.8% in the quarter a year earlier, arriving at our total US construction businesses' operating margin of 5.8% for the quarter versus 6.3% in the quarter a year ago; US facilities is at 2.8% operating margin versus 3.3% for Quarter 2 2011; and our total US operations were 4.7% in the current quarter versus 5.2% for the quarter last year; and our UK construction and facilities services business came in at 2.8% for the current quarter versus 3.1% last year.

2012 second quarter -- US electrical construction services results were down 100 basis points quarter over quarter as 2011's second quarter was favorably impacted by the resolution of uncertainties on certain larger projects which we discussed at length at this time last year.

Our second-quarter US mechanical construction services segment operating margins of 5% were improved from the year-ago's quarter and benefited from profits recognized on several projects that progressed to the early stages of completion during the current quarter and which had a dilutive effect on reported margins in Quarter 1 of this year.

Facilities services operating margin declined despite improved performance from our mechanical services, industrial services and government services divisions. And as Tony previously mentioned, our commercial site-based services performance within the quarter were below our expectations, inclusive of USM, which is coming out of their seasonally weakest quarter.

UK construction and facilities services operating margins decreased due to their engineering division reporting a modest operating loss within the quarter which offset improved operating margins from the facilities services operations.

Our income tax provision for the quarter is reflected at a tax rate of 38.3% which is slightly more than the 2011 Quarter 1 rate of 37.9% due to favorable discrete items that occurred in 2011. Consistent with my Quarter 1 commentary, I still anticipate that our full-year 2012 rate will approximate 39%.

Cash provided by operations for the second quarter was $21.5 million which represents a reduction over the $41.4 million of cash provided by operations during 2011's second quarter.

For the 6-month period, cash used by operations is $11.6 million, compared to operating cash flow of $6.3 million. The variations in both reporting periods is due to the continued reduction in our net [over-billed] contract position. Additionally, we utilized $8 million of cash to fund share repurchases within the second quarter. On a cumulative basis, we have expended approximately $49 million of our authorized program amount.

Please turn to Slide 6.

Additional key financial data on this slide not addressed during my highlight summary as follows. Quarter 2 gross profit of $194 million represents 12.2% of revenues which is up $19.3 million from the comparable 2011 quarter. There were no restructuring activities in the current quarter. And our diluted income per common share from continuing operations for the quarter is $0.49 compared to $0.43 per diluted share a year ago. 2011's Quarter 2 diluted income per share from continuing operations on an adjusted basis reflecting the add-back of the aforementioned transaction costs associated with our acquisition of USM would have been $0.48 per share.

Please turn to Slide 7.

I will now discuss the results for the 6-month period ended June 30, 2012. Revenues of $3.1 billion increased 19.7%, with all reporting segments generating high revenues in the year-to-date periods. Consolidated organic revenue growth for the 6 months is 10.2%. Our US mechanical construction and US facilities services segments generated revenue increases of 28.7% and 23.6% in the period, respectively, from both business acquisitions and organic activities. Year-to-date gross profit of $374.7 million, which is higher than the representative year-ago period by $43.3 million, and is 12% of revenues. Consistent with our quarter results, gross profit margins on a comparative basis are down period over period due to project mix and reduced contributions from our facilities services segment due to the weaker performance of our commercial site services business.

SG&A expenses of $272.2 million represent 8.7% of revenues, compared to 9.1% of revenues for the corresponding 2011 period. And excluding transactions costs incurred in connection with the acquisition of USM from 2011's results, SG&A as a percentage of revenues would have been 8.9% for the 2011 period.

As previously mentioned, the absolute increase in SG&A expense levels is due to incremental SG&A from businesses acquired, as well as incremental SG&A necessitated by organic revenue growth. Despite this increase, we have been successful in reducing the relative percentage as we continue to leverage our cost structure.

Year-to-date operating income is $102.5 million, or 3.28% of revenues, and represents a $10.6-million increase over 2011's year-to-date performance.

Diluted earnings per common share from continuing operations were $0.89 for the 6 months ended June 30, 2012, compared to $0.77 per common share in the corresponding 2011 period on an adjusted -- I'm sorry -- on an adjusted basis, reflecting the add-back of transaction costs associated with the acquisition of USM, that $0.77 would have been $0.82 for the 6-month period ended.

Please turn to Slide 8.

As Tony touched upon, our balance sheet remains strong with sufficient liquidity as represented by $434 million of cash which is available to meet our current working capital requirements as well as for organic and strategic investment opportunities. Additionally, we're using cash obviously to meet our quarterly dividend commitment and obviously to participate in our current share repurchase program.

Changes in goodwill year over year relate to 2012 acquisition activity and the finalization of purchase price accounting for prior acquisition, while the decrease in identifiable and tangible assets is due to amortization expense recorded on both the quarter and the year-to-date periods. Total debt is essentially unchanged since December 31, 2011, and our debt-to-capitalization ratio continues to remain low at 10.79%.

I know I sound like a broken record because I say this every quarter, but we really are continuing to do a good job of managing our project and all the risks that we deal with on a daily basis, and I believe it's clearly reflected in our balance sheet.

With that overview complete, I would like to return the presentation back to Tony. Tony?

Thanks, Mark. Everybody should be on Page 9.

So we're talking about backlog. Backlog at the end of the quarter stands at approximately $3.3 billion -- relatively flat since year end and down approximately $259 million when compared against June 2011. As Mark mentioned, all the figures we have now exclude our former Canadian subsidiary and include our USM acquisition.

With regards to the $259-million reduction, the largest piece of that reduction is associated with our UK subsidiary. We've made a decision that we would not try to participate in a large way in the UK construction market right now as it's a very difficult market, it continues to be weak and the risks outweigh any rewards we can get for the majority of the market. So we're trying to pick our niches and play in the UK construction market but not grow it. That being said, our UK facilities business continues to grow and is well-positioned in the market.

Year to date, we've had 10.2% organic growth and backlog is relatively flat with the end of the year. We've talked about this over the last several calls. Part of the reason for it is the current mix of work we have. It's fast-paced, it's [cyclically] complicated, it's large industrial and commercial products that do not have their full value reflected in backlog. The work tends to be more owner-direct. We're involved in the decision-making earlier -- the scope definition (inaudible) process -- and we provide, design, assist and design build capability on those projects. We're working from task orders, purchase orders and (inaudible) while protected from a contractual standpoint, we don't have the full value of the project in our backlog, and once we get it we tend to work very quickly and it works off in between periods.

We've got 4 quarters of very strong organic growth, and if you look back at them, Q3 2011 was 9.6%, Q4 2011 was 7.3%, Q1 2012 was 11.1% and the current quarter just reported on is 9.4%. And if you look over that period, backlog has not moved appreciably to foreshadow growth in revenues. So we're definitely doing a little different mix of work, and a lot of that's based on the investments and capabilities we've built over the last 4 or 5 years to get closer to the customer and be able to perform this fast-paced, complicated -- both technically -- technical industrial work and commercial work.

Separate and distinct from this, our small project work is picking up and our mid-size project work is picking up. And they are faster-paced than they traditionally have been because when we have labor availability and once a customer makes the decision, you want to help them finish that work as quick as you can just in case anybody wanted to change their mind anywhere along the path. And they have waited so long to make some of these decisions that they have really reduced the amount of time to get it done because they want it completed then, either to get the energy savings, the new facility use or the extra productive capacity that they desire.

I know I've mentioned it, but it bears repeating. Even with this choppy market and 10.5% organic revenue growth, we've had relatively flat backlog. And some of that has to do with the different businesses we've been able to buy and add to our mix and in the organic capability that we have -- from PMI to PPM to [Boston] to Pepper to USM and to SIC. They've all added capability -- and SIC being our recent one -- Southern Industrial -- that has helped us build our commercial capability and our industrial capability and get closer to the customer. And when you look at the composite to that backlog on Page 9, you'll see that commercial is showing a little more strength. It's about $1.0 billion -- what we did -- of the total, or 30%, as of June 30. We have some advanced technology projects in that backlog, and we've always put them there, even though they may be more industrial in nature. And it's increased 22% since the year-earlier period. USM backlog is also in commercial and it's grown since we've had it. Now all the work's in backlog. We don't have the full value of those contracts fully reflected or the financial impacts of those contracts. We've had a lot of the expense and not all the benefit yet. And business development continues to improve at USM and we find ourselves in a stronger position than we were 6 months ago. The closing statistics are moving in the right direction and we definitely have a favorable reception from our customers on their expanded product offering.

We probably shouldn't even talk about hospitality anymore because it's non-existent. And it's been -- quite frankly, we've replaced that with industrial and it continues to be strong. And our (inaudible) shop business is as strong as it's been at any point in the last 3 years. And we added to our capability (inaudible) with a new hydroblast facility -- our La Porte, Texas, facility -- and those that know the ship channel know that within that La Porte area is where most of the big refineries are, and we'll now be able to offer one more offering to our customers to be more of an end-to-end service provider and we're excited about that.

Health care's down a bit, and we said this is lumpy work. We are looking at some good health care jobs. Just like we talked about the other work at the beginning of the year in industrial, you win it -- it's binary -- you either win it or you don't. And we'll see. We have great capability and we do very well in that market and we should win our fair share as these projects develop.

Institutional is basically flat from where it was the year-ago period. I have no idea exactly how the government budgets play out and everything. I do know this. Most of what we do saves the government money and you would think that would be at the forefront of what anybody would care about at that time. And most of what we do allows for the government to operate at a more-effective cost structure, and a lot of it leads to higher facility utilization and consolidation. So hopefully our government will allow us to continue to do that.

And then transportation and water and wastewater. They're good long-term markets for us. They have small ups and downs. This is the award period between now and the end of October, and we should win our fair share there, too.

So basically, revenues is up 20% -- half of that being organic as we get to the year. Backlog is not the best indicator -- at least it hasn't been over the last 4 quarters -- of what we're doing. We continue to operate in a challenging and choppy market, and we continue to execute very well.

And with that, I'll ask you to turn to Page 10 and 11.

So talk about the balance of the year. As we look to the balance of the year, we are pretty much in the same position as where we were with the first-quarter call, although with a little better visibility. So here's what we're going to do. We're going to take guidance up by a dime at the low end to $1.80 and we're going to increase the top end of the range by a nickel. We're going to leave revenue -- so the range will be $1.80 to $2.00 on EPS from continuing operations. We will leave the revenue guidance at $6.3 billion for the year as -- on the organic growth, as I went through those numbers you can see the compares on organic growth get a little tougher as the rest of the year unfolds.

Overall, we're executing very well in most of our businesses. We need to continue to improve the site-based business with an EFS -- and we will -- and also continue our excellence in our mechanical and electrical construction segments. And we'll keep our focus on large-project execution and selection. The market's choppy and has been for quite some time. And we will continue to focus on those things that we control -- project selection and execution, cost discipline, acquisition integration, cash deployment for both investment, share repurchase and dividends. And we will focus, focus, focus on improving the businesses and keeping them well-positioned to compete in any market.

We've been adept at building and buying capabilities and businesses that allow us to move into growth markets, and we have been relatively successful at this through both organic and acquisition investments over a very long period of time. It's a choppy environment. The general [buys] has been up over the last 7 or 8 quarters. But we've learned to be nimble, tough-minded and decisive through these stop-and-go markets.

And with that, Lashonna, we'll be happy to open up for questions. Lashonna?

(OPERATOR INSTRUCTIONS.) Your first question comes from the line of John Rogers with D.A. Davidson.

Good morning, John.

Hi. Can you hear me?

Yes we can.

Okay. Great. One -- and I apologize if I missed it -- what was organic backlog growth?

There was no organic backlog growth.

Okay. Okay. And then -- and was there anything taken out of backlog because of the dispositions?

No. All numbers that we reported are comparable year over year. We took Canada out and put USM in because we completed it June 30 of last year.

Okay. Okay. And then, Tony, you mentioned acquisitions in your last part of your comments there. And is there anything that particularly intrigues you at this point or you busy with USM or kind of what are your thoughts there now?

We're not likely to add anything to the management team that's -- we've got our best folks. Luckily we had them -- that was always part of the plan that they were going to go into USM -- a lot -- some of our best folks. So we wouldn't add anything on top of there. We need to get that right. We like companies like Southern. That size company adds nicely and builds capability and then we can help grow it -- and led by able management that we can augment. Yes, we like industrial. We like electrical and mechanical construction and services. Government -- we like to grow organically right now. The outlook -- you have to pay attention to what you'd be thinking about doing there right now because of all the talk around budgets and sequestering. You've got to get a little more clarity there. Our guys have done a great job growing that business organically. We would always look to our mechanical service capability in the right geographic markets. And we like industrial across the board. But there's nothing -- deals happen when they happen. I would tell you, in general, we always have that private market that we're working in and we do fairly well in. The larger market -- it's a very slow market right now. You've seen all the commentary around that from people that are much more active in the deal market than we are.

Okay. And one other minor point, if I could. On the electrical side, are you seeing much in activity in either low-voltage or communications projects there? Because you hear mixed reports about what's happening in that market.

That's part of our business.

Yes.

There's always been this underlying (inaudible) with us. We're an IBW shop and part of that market's been taken over by CWA, especially in New York. It's an okay market. It's no different than the general markets overall. It follows the commercial market a little more than it follows anything else, and the data center market has supported it quite well.

Okay. Great. Thank you and congratulations on the quarter.

Thank you.

Your next question comes from the line of Alex Rygiel with FBR.

Good morning, Alex.

Thank you. Good morning, gentlemen. Tony, you mentioned that part of the backlog decline year over year was a function of the UK -- exiting the UK construction market. Should we expect your revenue from the UK operations to decline going forward now?

Yes. Be careful. I said -- de-emphasized, not exited.

No. I got it. Fair enough.

Alex, I know that's been something you've been asking about for a while, but it's de-emphasized.

It could, Alex, but we had good growth in the services area. We're focused much more on the composition of the revenues there and the composition of the margins over the long term to build that business. And I think you've seen steady improvement over there over a number of years. I think you remember the past. We're probably -- we've been fortunate that we've been able to get that into a much more steady performer with more of a service focus, and it's unlikely that the construction business will grow there for us.

So if the backlog transitioned from construction to service, why was there -- why -- how can revenues stay flat but yet backlog was down?

The way (inaudible) small task order work, Alex, that never really gets reflected in backlog. We have some very nice contracts where we're implementing large-scale programs on the small-project side through our services arms, much like we would here, that never is -- full value is reflected in backlog. So you get the revenue growth without the backlog growth -- much of the same phenomenon we have going on the overall business, just with smaller projects.

Have you seen that trend in any other cycles in the facilities services business?

Yes. On the small project side? Yes. Absolutely. What -- many years ago when I was at UTC, we absolutely saw it. We're also seeing it in our own mechanical service business today. And I think it's been EMCOR's history in every cycle. The small project work starts to show growth outside of backlog before the backlog growth.

If we were to take a look at a snapshot of implied margins in backlog today versus a year ago, how has that changed?

It probably hasn't changed much, Alex. I wouldn't say it's -- maybe on the low end the small project work's solidifying, but the large stuff which will drive -- sort of $5-million-or-more project which drives a lot of our revenue hasn't changed a lot. It hasn't gotten worse. It has stabilized and we're forced to just be more efficient and better at it to generate acceptable margins.

And I've got a question for Mark. Mark, did you say that for the full year the tax rate in 2012 will be 39% despite the fact that it's tracked at 38% in the first 6 months?

Yes. Consistent with last year, you may have remembered, Alex, that the UK is legislating some tax decreases, which is obviously favorable. However, we have a deferred tax asset in the UK and as a result of that, when it does get legislated into law which is contemplated to happen in September, we're going to actually have to record a provision charge because we're going to have to write the value of that asset down. Unfortunately --

And so when we --

So unfortunately --

Keep going.

We can't reflect that currently because it hasn't been legislated yet so it'll be a discrete event when it happens either in Quarter 3 or Quarter 4.

And when we think about the tax rate for 2013, does it revert back to 38%?

It will move in that direction because -- I can't speak to what the UK government's plan on the tax front is -- if they're going to continue to drop corporate rates or not, but assuming that that doesn't happen, it would revert back closer to 38% than 39%.

Very helpful. Thank you, guys.

You're welcome.

Your next question comes from the line of Rich Wesolowski with Sidoti & Company.

Thanks.

Good morning, Rich.

Good morning, everybody.

Good morning.

Would you mind elaborating a bit on your prepared comments on USM, specifically mentioning the underlying factors that you look at that give you a confidence that you could have that outsiders don't see right now that the performance is going to improve in the second half and into '13?

Well, the first thing we look at is are we getting the synergies that we said we'd get? I think when we made the deal we said $5 million to $6 million. We're exceeding that number. So that tells us that the cost base -- although not fully there now -- will be in good position to leverage for future growth. The second thing is are you seeing more opportunities or less opportunities than you were 6 months ago? We're seeing more opportunities. And then are you winning the opportunities that you have targeted and at what rate are you winning? And that number's up substantially. And finally, are you seeing it across not only the total package when you put it all together, but are you seeing it in the individual lines of service? And that's happening. And finally, are some of the customers that sat on the sidelines -- are some of them [start] to ask you to be engaged in their solution and bid on the work and are you winning some of those customers back? And that is starting to happen, too. So current performance unacceptable, but there's a path to get to where we need to go and it's on all the levers -- both cost, revenue and then productivity also because we also are able to leverage some of our existing infrastructure to support the combined business of USM and our legacy site-based business.

How easy or difficult are you finding it to manage their third-party service model which is a good deal different from what EMCOR has done historically?

It's a -- it can be challenging, but we've been -- we do this anyway, Rich. We don't ever have 100% of labor on the ground on anything. That being said, in some ways it's a lot easier because we can define the scope and (inaudible) the supplier to the scope and we don't have the labor risk so we can pass on the variability of productivity that we usually have to manage.

Was there any dilution to the facilities margin -- organic facilities margin -- from the poorly-performing mechanical service contracts that were referenced in the past few quarters?

They were poorly-performing mechanical service contracts; what they were was start-ups on site-based contracts and a little bit of dilution. Those contracts did turn to profitability, although modest, in June. But the legacy site-based business, as a result of those contracts, had a very tough first half. So yes, the answer would be the legacy site-based business did dilute the facilities margins in the first half of the year.

But Rich, just to make sure because I thought I heard the question a little bit differently. With regards to mechanical services projects where we previously had reported some project write-downs in previous quarters, there was no dilution in this past quarter related to any of that activity. That seems to be all cleaned up at this point.

Great. Thank you. And last one. Maybe just a personal gut view of the potential strength of the private non-residential cycle which hopefully we're beginning. On one hand, you still have high vacancy rates for offices and retail, but on the other, it's just been so long since a lot of these big buildings have invested. And I'm wondering whether this can be a strong cycle for EMCOR, even if we go through this humdrum economy over the next 2 or 3 years.

This is going to eventually be a strong market end cycle. I would argue we haven't had much of an up-cycle at all. We've managed to [drive] it out through very good execution and smart investment in the right kind of capabilities, and moving between different sectors organically. I think your thesis is right -- there has been a lack of real investment outside of a couple niches, whether it be power or industrial. In industrial, you've got to go to regional and then you've got to go regional, you've got to go to certain markets -- end markets. There's really been a lack of general capital spending to any substantial (inaudible). So we've picked our spots. I think when it rebounds, it will rebound strongly. And I think uncertainty drives all this. When Mark talked about taxes, he said 38%, but you would hope eventually that there would be large tax reforms and customers like -- a company like EMCOR would benefit in a big way from that, not only on our own tax rate but what it could mean for our customers and the unlocking of capital. So there is a lot of uncertainty that's keeping capital on the sidelines and you know probably a lot more about all those trends than I do, but I do know --

You'd be surprised.

I do know what you're seeing in our customers and why you're not seeing some of these large projects be fully developed and go into backlog is because here's how it works now on some of these industrial work where people make some investment to expand capacity or become more efficient, even on building efficiency -- is they think, think, think, study, study, study, and when it's time to execute, they say, "Okay. Let's do this in pieces and let's refine as we go along because the market may shift and I want to keep maximum options open as I do this." And you know you're going to work with them the whole time. You don't have the firm fixed price for the whole thing. And that could be a benefit to you, especially in the design/assist world that we're working in on these, and they're fast-paced. And once they decide to do it, they want to get it up and running as quick and take advantage of the market window they see. That's different and maybe that trend will continue. And fortunately, we've built the capability to be able to do that. A lot of smaller contractors could never dream of doing that and -- to be able to move resources and capabilities and learnings between projects like that. So I do think there is pent-up demand. I've never been one to sort of say it's right around the corner. We'll be in the middle of it when we know it. I can tell you we're not in the middle of it right now, and my gut tells me we're not in the middle of pent-up demand right now being release. We're being -- we're in the middle of people making smart, targeted investments. That is not a groundswell of investment and it's reflected in the end-market numbers and it's reflected really in the types of work that we have in our backlog.

Great. I appreciate your time.

Thank you, Rich.

Your next question comes from the line of Adam Thalhimer with BB&T Capital Market.

Good morning, guys. First, I wanted to ask on Ohmstede. You said the shop business was strong; the service business was a little bit soft. What's the read through there?

Well, shops are very strong. Shops -- we service everybody, not only our own turnarounds that we have, but everybody's. The service business has been okay. It's the turnaround business that hasn't been as strong. I said the field service business, which really means turnarounds. The read through there is we had a couple turnarounds pushed out into the back half of the year. There is a natural constraint on labor, so it's not like -- it's whatever you were going to do plus that in the back half of the year. But the read-through on that is the broader market -- we penetrated well and probably gained share. Our share of the turnaround market -- our customer base decided not to do as much work as they thought they were going to do, and they're either -- they're probably going to do it between fourth and first quarter. Some of it got pushed to second quarter because our second quarter was a little better than it was a year ago.

Okay. And wanted to ask on cash flow. Seasonally, that tends to pick up in the back half of the year. Is that a reasonable expectation for this year as well?

Yes. Adam, I think obviously one of the things that's driving the first-half performance, as I mentioned just a little while ago, is that our net build in advance position has dropped significantly from the end of 2011, and that was not unexpected because we were successful in negotiating and getting [billed and paid] some advance payments on some significant work that's flowing through revenue right now. But you're correct. We do generate the majority of our -- and obviously, in this year -- all of it in the back half of the year. Our forecasting is not showing us that the trends are going to be any different in the back half of 2012 and so we're still anticipating to hit our internal targets with regards to that.

Okay. And then last question. I just wanted to ask about -- and you kind of touched on this before -- but just the kind of quoting activity you're seeing, and I know there's a lot of caution out there and people don't want to move forward on projects, but are you bidding a lot of projects?

It depends on the market. Are we -- there's always things to bid -- right? -- because even its downtime, it's a huge market. Are the opportunities -- the way I would think about it is are the opportunities any better now than they were a year ago? My read on it is we're getting more selective and smarter about how we bid every day because we've had to. Now we're in the fourth year of this event called The Great Recession. Is it up marginally? Yes. Is there a groundswell? No. It's not like there's all kinds of stuff coming over the (inaudible) and we get to pick anything we want and just do that work, and that's sort of what it started to look like at the end of 2007 and we're clearly not there right now.

Great. Thank you.

Your next question comes from line of Jeff Beech with Stifel Nicolaus.

Good morning, Tony, and congratulations on a really good quarter.

Thank you.

From reading in the 10-Q, it looks like USM lost money in the second quarter. Is that accurate?

Yes.

And are you expecting profitability in the second half?

Yes.

Alright. And excluding commercial and industrial markets, do you see right now bidding activity picking up in any other end markets that you serve?

No. There's just really no -- it's about the same as it's been, Jeff.

Alright. And I'm seeing a lot of energy capital projects, particularly chemical, petrochemical plants. Industry is trying to get new L&G export facilities. This kind of energy capital projects -- is this an area of strength for you that would be an opportunity over the next couple of years?

We will do pieces that -- and parts that support it. Are we going to be an EPC on a big chemical or L&G plant? Well, you know the answer to that is no. Would we, in the right markets, do balanced plant work? Yes. Will it use capability that we have to support the people that will supply those equipment? The answer to that's yes, especially with some of the new capability we've built to have an expanded service offering. Will some of those plants require work from Ohmstede? The answer -- and other industrial [products] we have? The answer to that's yes, too. So we won't be the primary beneficiary, except maybe in some of our industrial companies in Ohmstede. But the secondary and tertiary effects of that -- we should be beneficiaries of. And, of course, anything that observes -- absorbs highly-skilled technical labor is a benefit to us.

Alright. Thanks a lot.

Thank you, Jeff.

Your next question comes from the line of Richard Paget with Imperial Capital.

Good morning, guys.

Good morning, Richard.

Well, I guess I'd be remiss if I didn't ask a question about USM. Maybe just now that you've had it under your belt a couple more months -- and I know the integration isn't going as quickly as you thought -- but could you just update us on a quantification of what your expectations for more normalized margins should be once this business is up and running and all working together?

I don't think we've backed -- we're not ready to declare victory and defeat here. I think we've adjusted much yet. I think we still believe it can operate at margins above where EMCOR was at our peak, so that's north of 5%. The underlying market should support that. We've, in a lot of ways, hit by the perfect storm or lack thereof. We've had no snow. We've lost some key customer. We lost them right before or right after our acquisition, and we had a less-than-robust business development pipeline. Pull all those together, we're clearly not performing where we should. The cost structure's coming in line. And I would actually -- in a lot of ways, the integration's going better than we thought. We're just not seeing it in the performance because we've had to move faster on integration than what we thought. The way I would argue is on the cost base elements and the structural elements of integration, we're probably 6 to 12 months ahead of schedule, and on the financial performance we're at least 12 months behind schedule. And that's a dichotomy that ought to intersect to create much better performance when we start to get alignment in new business.

Okay. And then it looks like the share buyback program was a little bit slower in the second quarter [than] the first quarter. Maybe if you could elaborate on how you're thinking about it.

Yes. We -- I'll speak to the numbers. We -- you saw the information in the queue. We repurchased just south of 300,000 shares within the quarter, and year to date 2012, we're roughly 773,000 for the program calendar 2012. So I don't think there's been any motivation for us to slow down. It's just how the stock has traded and obviously there's a significant portion of time where we're --

Blacked out.

We're blacked out. We're blacked out from participating. We have much more footing if we designate a program in place. And I'll let Tony pick it up from there.

No. I think we've been executing. We're halfway through. We announced it in September. We didn't get a good use of capital at this point and we think that, coupled with the dividend -- we've shown a willingness to return cash to shareholders through those programs.

Okay. And then finally, I think there's been -- at least in the northeast and other parts of the US -- record heat and that's continued into July. Is that business still going pretty strong for you guys?

Yes. And we should see whatever impact will be here in the third quarter and we're certainly hoping that we're able to do more project work and not just break/fix business and customers will release some capital. We'll know more about that as we move through the quarter.

Alright. Thanks. I'll get back in queue.

Sure.

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

Hi, guys. A lot of my questions have already been answered, but talking about the improvement in small projects, can you provide any color there? (Inaudible) coming back and what are the drivers really behind the improvement there?

Well, I think the driver's really a little more maintenance spending, a little more worn-out equipment, and a drive for energy efficiency. That's always the underlying factors. You heard me speak earlier. Do I think this is a groundswell of pent-up demand being released? My answer to that would be no. What I think is the repair versus replace decision is getting more unadvantageous for our customers so they're having to do the replace. And then also, you have buildings being repurposed and a lot of times you upgrade the system then when they get repurposed.

Okay. And one more question for you. Talking about USM's business development and how maybe winds are getting a little better. What does that look like? What are you doing to improve business development at USM?

Well, the first thing is we've got better salespeople, and that sounds like a simple answer but we had people that we've known and trusted for a while, put them in there to reinvigorate it that know those end markets very well. And we did that about 5 months ago, 6 months ago. Second thing is get back out in front of customers. We had very good receptions at things like [Specs] and [Prism] where you get in front of people and you tell them what your offering actually is and you buy the prime real estate at those places and you also get your people on all of the key boards so that they can now be part of the decision-making process of how standards are set and how people do best practice-sharing and everything else. Then you actually go back and call on customers. You did it the old-fashioned way. You win business proposal by proposal, customer by customer. And what had happened -- and we knew some of this, but we didn't know to the depth that it was -- they had basically gotten out of the market for about 6 months as they were selling the company. They had bids on the table but the bids weren't being -- and proposals on the table, but they weren't being as aggressively followed up on or certainly responded to as an EMCOR person would typically do.

Right. Well, thank you. That's helpful.

Thank you.

Your next question comes from the line of Tahira Afzal with KeyBanc.

Good morning, gentlemen. Nice quarter.

Good morning, T.

I guess most of my questions have been answered. The one question I would love to get a bit of color on is national elections. How do they typically impact activity levels for your company and how has that change given really the mix of end markets you have going into these elections versus the last? And it seems like some of your sponsors have talked about holding back on capital spending, very much along the lines, Tony, of what you were saying earlier on in your prepared commentary. So it seems you've (inaudible) reflected some cautious spending in the near term, but just wanted to get a sense of that.

T, I've got no clue on the elections and I -- none. I -- all I know is we'll wake up whatever date that is and we'll still do mechanical and electrical construction. We'll still be nimble between markets and we're going to serve our customers any way we can.

Fair enough. Well, thank you. That's the only thing I had left, so --

Okay. Is that it? Lashonna?

Your final question comes from the line of Alex Rygiel with FBR.

Thanks. Just one follow-up. Tony, are you guys involved at all with Olympics? And how do you view the Olympics? Is that a distraction to the UK operations or are you going to benefit from that?

No real benefit. Yes on the distraction because you sort of have to step back from the market here for a couple weeks around London and so project work will slow down. We actually expect that business to have some real not big productivity, but productivity won't be great here for a couple weeks. So that would be the impact on the Olympics for us. Kevin didn't qualify, so --

I tried hard, Alex, but I just didn't make it.

(Inaudible).

There's always the Winter Olympics.

(Inaudible) over there cheering me on.

Kevin, go -- try for curling in the winter.

So that really -- it won't be a net positive for us. The only net positive would have been -- would be is you may see why we're being so successful on some of the small project work potentially is other labor's being absorbed, but a lot of this work's been done by very large contractors and we really didn't do -- I don't think we did any Olympic work in our business. Many years ago, we were involved in the '02 arena but that -- as a venue, but it didn't have anything to do with the Olympics. Is that it?

That's it. Thank you.

Thanks, Alex. Lashonna, anybody else?

At this time, there are no more questions. Management, do you have any closing remarks?

I'd just start by thanks. We continue to take advantage of whatever markets are available to us and our folks continue to execute very well. And hope everybody has a safe remainder of the summer and we'll see you all in October, if we don't see you earlier out on the road. Thank you. Bye.

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