EMCOR Group Inc (EME) 2017 Q4 法說會逐字稿

Good morning. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the EMCOR Group Fourth Quarter and Full Year 2017 Earnings Call. (Operator Instructions)

Mr. Bradley Vitou with FTI Consulting, you may begin.

Thank you, Adam, and good morning, everyone. Welcome to the EMCOR Group conference call. We are here today to discuss the company's 2017 fourth quarter and full year results, which were reported this morning.

I would like to turn the call over to Kevin Matz, Executive Vice President of Shared Services, who will introduce management. Kevin, please go ahead.

Thank you, Brad, and good morning, everyone. Welcome to EMCOR Group's earnings conference call for the quarter and full year 2017.

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

Please advance to Slide 2. This presentation and discussion contains forward-looking statements and certain non-GAAP financial information. Page 2 describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides.

Over to Slide 3, it depicts the executives who are with me to discuss the quarter and full year 2017 results. They are Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, Executive Vice President and Chief Financial Officer; Maxine Mauricio, our Senior Vice President and General Counsel; and our Vice President of Marketing and Communications, Mava Heffler.

For call participants not accessing the conference call via the Internet, this presentation, including the slides, will be archived in the Investor Relations section of our website under Presentation. You can find this at emcorgroup.com.

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

Yes. Thanks, Kevin, and welcome to our Q4 2017 and full year 2017 commentary. I want to apologize upfront for my voice. I have a little bit of laryngitis. I guess I spent a little bit too much time on airplanes over the last 6 weeks.

I'm going to speak to pro forma results for 2017 throughout my introductory comments. Mark is going to cover the financial performance in detail for the fourth quarter of 2017 and full year 2017, and I don't want to be repetitive. I will be covering Pages 4 through 7 in my introductory comments.

By any measure, we had a fantastic 2017. We set annual performance records for revenues, operating income, operating income margin percentage, net income and earnings per diluted share from continuing operations and, most importantly, cash flow from operations.

We delivered a record $366 million of operating cash flow in 2017. We were able to overcome the significant negative impact of Hurricane Harvey to our industrial segment and the important fall turnaround season and still deliver outstanding performance for our shareholders.

Our U.S. Electrical and Mechanical Construction segments carried the day with record performance across the board. We have operating income growth of 54% for the year on a combined basis across our U.S. Electrical and Mechanical Construction segments. We 2017 operating income margin of 8.2% in our Electrical Construction segment and 7.2% in our Mechanical Construction segment. We were aided in our Mechanical Construction segment by 60 basis points as we settle some large disputes and claims during the year. However, even adjusting for these claim and dispute settlements, we performed in an exceptional manner in both construction segments and had outstanding operating income margins and revenue growth.

We executed well across all trades and across all market sectors. Discipline matters in our business and in these segments, the results show exceptional discipline in executing for our customers and shareholders.

Our construction results were driven by excellent productivity, planning and job site execution. We leveraged our skilled workforce to deliver great results for our customers and finished some large complex project work with excellent results.

Competition for skilled labor is becoming more of an issue, however, our investments in them, prefabrication and peer learning have served us well as we are able to reduce our peak labor on our work through these investments.

Although we have strong demand for our Construction Services, our results are driven more by execution and a strong pricing market. We still have a lot of competition for the work. We have to be disciplined and selective in winning projects, and then we have to be driven to deliver the productivity and quality to earn these results. It was an exceptional year on our construction segments, and we look to continue our success. We have to earn that success every day on our every project.

Our Building Services segment had a strong year driven by our Mechanical Services business. We delivered 40 basis points of operating income margin expansion on a 6.8% organic decline in revenues. That's tough to do. We move the segment to a more favorable mix, and both our government and commercial site-based businesses exercise strong cost to book discipline as our revenues remained challenged.

In Mechanical Services, we had excellence in project execution and delivery for our customers. We continue to see strong demand for energy savings projects as our customers look to make our facilities more competitive. We also had some nice new contract wins in our commercial site-based business. They did not drive 2017 results but should help us regain momentum in our commercial site-based business as we move into 2018.

Our Industrial segment had a very tough year. We discussed many times a tough comparison we had with an excellent 2016, where we executed well with some large, nonrecurring capital projects. Hurricane Harvey made an already challenging 2017 a year that produced poor results in the segment. The segment already was pressured by recapital spending, and then Harvey appended the fall 2017 turnaround season and continued to drive some recalibration by our customers into 2018.

Our U.K. Building Services segment continues to show improvement. Here, we're strong with 4.4% operating income margins and 4.4% revenue growth. Our U.K. team continues a steady improvement of our large scale restructuring that we executed over 4 years ago when we exited the U.K. construction market.

Backlog dropped from $3.90 billion at the end of 2016 to $3.79 billion at the end of 2017. Our domestic backlog is down $142.5 million versus the year ago period. I will discuss backlog more following Mark's comments, but we are still on a very strong domestic market for our services. And our drop is really a result of a very strong organic revenue growth from our construction segments, and we are still in the process of negotiating and developing several large food processing and waterways product projects that we believe will have a good opportunity to close by mid-2018.

Our cash flow was terrific at $366 million. Our balance sheet is liquid and strong. It provides us the foundation to continue to grow and build value for you, our shareholders.

With that, I will conclude my introductory comments and turn the call over to Mark.

Thank you, Tony, and good morning to everyone participating on the call today. For those accessing this presentation via the webcast, we are now on Slide 8.

As Tony indicated in his opening commentary, I will begin with a detailed discussion of our fourth quarter 2017 results before moving to our full year 2017 performance, some of which Tony just outlined during his executive summary.

As a reminder, all financial information discussed during today's call is included in our consolidated financial statements within both our earnings release announcement and Form 10-K filed with the Securities and Exchange Commission earlier this morning.

So let's discuss our fourth quarter performance. Consolidated revenues of $2.01 billion in quarter 4 are up $62.7 million or 3.2%. Our fourth quarter results include $35.9 million of revenues attributable to businesses acquired pertaining to the period of time that such businesses were not owned by EMCOR in last year's fourth quarter. Acquisition revenues positively impacted both our United States Mechanical Construction and United States Building Services segments. Excluding the impact of businesses acquired, fourth quarter revenues grew organically $26.8 million or 1.4%.

United States Electrical Construction revenues of $479.4 million increased $2.5 million or 0.5% from quarter 4 2016. Quarter-over-quarter revenue gains within the commercial, institutional and health care market sectors were mostly offset by revenue declines within the industrial and transportation market sectors, partially due to the completion or substantial completion of large transportation projects, which were active in 2016 as well as the early part of 2017.

United States Mechanical Construction fourth quarter revenues of $790.8 million increased $73.3 million or 10.2% from quarter 4 2016. Excluding acquisition revenues of $20.5 million, this segment's quarterly revenues were organically 7.4% quarter-over-quarter. This segment's revenue growth was primarily driven by higher project activity within the health care, commercial, hospitality and institutional market sectors, somewhat offset by reduced industrial construction project activity due to the completion or substantial completion of certain large projects earlier in the year.

EMCOR's total domestic Construction business fourth quarter revenues of $1.27 billion increased $75.8 million or 6.3%, with 4.6% being generated from organic activities.

United States Building Services revenues of $438.3 million decreased $5 million or 1.1%. Excluding acquisition revenues of $15.4 million, this segment's quarterly revenues decreased $20.4 million or 4.6% organically.

As has been the trend throughout calendar 2017, this segment's Mechanical Services division revenue growth was offset by revenue declines within their commercial-site based and Government Services divisions due to maintenance contract attrition primarily occurring in late 2016 as well as lower indefinite duration, indefinite quality project volumes from government-related activities.

United States Industrial Services revenues of $207.5 million decreased $29.8 million or 12.6% due to the continued impact of Hurricane Harvey on both our field services and shop services activities as we have seen both the deferral of maintenance work in addition to scope reductions at those locations, where we were providing services during the fourth quarter. As a result of the reduction in field services activities, the volume of pull-through repair work opportunities for our shop services was also negatively impacted in the quarter.

United Kingdom Building Services revenues of $96.6 million increased $21.7 million or 28.9% as we continue to see the operating benefits of new service contract awards. These new contract awards were successful in muting the continued weakness in small project and capital project activity within the United Kingdom.

The foreign exchange impact on quarterly revenues, for once, actually, was a positive $6.3 million.

My last comment on quarterly revenues is that our fourth quarter revenues of $2.01 billion represents a new all-time quarterly revenue record for EMCOR.

Please turn to Slide 9. Selling, general and administrative expenses of $204.2 million represent 10.1% of fourth quarter revenues and an increase of $9.3 million from the $194.9 million reported in 2016's fourth quarter. As a percentage of revenues, the current year quarter increased 10 basis point from the 10% reported last year. The current year's quarter includes approximately $4.5 million of incremental SG&A, inclusive of intangible asset amortization from businesses acquired, resulting in an organic quarter-over-quarter increase of approximately $4.8 million. This increase is primarily due to higher employment costs, mainly as a result of variable compensation program awards earned during -- earned due to the improvement in operating performance year-over-year. The modest increase in SG&A as a percentage of revenues is due to certain of our operating companies experiencing better-than-anticipated operating performance, resulting in incremental incentive compensation expense within the quarter, the true-up for actual full year performance.

Reported operating income for the quarter of $48.5 million represents 2.4% of revenues and compares to $74.5 million and 3.8% in 2016 fourth quarter. Our current fourth quarter operating income includes a $57.8 million noncash impairment loss on goodwill and identifiable intangible assets. Specifically, as a result of our annual impairment testing as of October 1, we concluded that the goodwill of our U.S. Industrial Services segment is impaired, resulting in a $57.5 million noncash earnings charge. This is due to prolonged weak demand for our shop services offerings as a result of continued curtailed capital spending from our customers in addition to the impact of foreign competition. Additionally, we have seen reductions in pricing within both our field and shop services offerings due to challenging market conditions. The remaining $300,000 noncash charge is due to the diminution in value of a tradename for a business previously acquired within our U.S. Building Services segment.

The current quarter impairment charges, as well as the intangible asset impairment charge taken in 2016 fourth quarter, are not reported and are discrete reportable segment information reflected on the lower third of Slide 9. The add-back of these items results to non-GAAP operating income of $106.3 million or 5.3% of revenues for 2017's fourth quarter as compared to $76.9 million of non-GAAP operating income or 3.9% of revenues in the comparable 2016 period.

Now I will speak to the operating income results from our reportable segments for the quarter. Our U.S. Electrical Construction Services segment operating income of $40.3 million increased $9.2 million or 29.4% from the comparable 2016 period. Reported operating margin of 8.4% represents 190 basis point improvement over last year's fourth quarter. The increase in both operating income and operating margin is due to continued improved contract performance across most market sectors served with transportation, commercial and institutional project activities, contributing the most significant period-over-period improvement.

2017's fourth quarter U.S. Mechanical Construction Services segment operating income of $61.3 million represents a $29.3 million increase from last year's quarter. Reported quarterly operating margin at 7.8%, which is 330 basis points higher than 2016's fourth quarter. Quarter-over-quarter improvement and project activities within the industrial, institutional, water and health care market sectors more than offset reduced project profitability within the hospitality market sector and high-tech submarket sector. As a reminder, our U.S. Mechanical Construction segment experienced a substantial project loss in 2016's fourth quarter, which negatively impacted this segment's 2016 fourth quarter operating margin by 310 basis points.

Our total U.S. Construction business has reported an 8% operating margin for the quarter just ended as compared to 5.3% in last year's fourth quarter. Operating income for U.S. Building Services of $21.1 million represents 4.8% of revenues and is roughly in line with this segment's 2016 fourth quarter performance.

Our U.S. Industrial Services segment operating income of $2.5 million represents 1.2% of revenues, which is a decrease of approximately $8.7 million from last year's fourth quarter. The reduction in quarter-over-quarter performance within our Industrial Services segment is due to the continued impact of Hurricane Harvey on our field services operations as well as reduced pull-through repair work for our shop services. As our customers continue to evaluate and execute the recovery plans, we are hopeful to see resumed normal activity within this space.

U.K. Building Services operating income of $5.7 million represents 5.9% of revenues, which is an increase of $3 million and is a 220 basis point improvement over last year's fourth quarter. This segment is continuing to make good progress and transitioning the new service -- their new service contract awards despite small project and capital project demand not yet back to normalized levels.

We are now on Slide 10. The table on Slide 10 weighs out those discrete items that impact quarter-over-quarter comparability and reconcile the non-GAAP operating margin and non-GAAP operating income that I referenced during my commentary on the previous slide to our as reported amounts.

As you can see, when the goodwill impairment is removed from our quarter 4 2017 results, as well as the identifiable intangible asset impairments taken in both quarterly periods, our adjusted non-GAAP operating income for the current year quarter is $106.3 million or 5.3% of revenues, which favorably compares to $76.9 million or 3.9% of quarter 4 2016 revenues and is a 38.2% improvement.

Tony previously referenced our exemplary operating cash flow for full year 2017 of $366.1 million, of which $127.9 million was generated during the fourth quarter. This represents excellent performance when facing the headwind of our industrial services weak at second half 2017 operating performance.

Please turn to Slide 11. Additional key financial data for the fourth quarter not addressed on the previous slides are as follows. Quarter 4 gross profit of $311.1 million represents 15.5% of revenues, which has improved from the comparable 2016 quarter by $39.1 million and represents 160 basis point improvement over the 13.9% gross margin in 2016's fourth quarter. The quarter-over-quarter improvement is due to our strong revenue growth within our U.S. Mechanical Construction Services segment as well as improved project and service execution amongst all of our reportable segments other than U.S. Industrial Services.

Diluted earnings per common share from continuing operations for the fourth quarter is $0.90 as compared to $0.69 per diluted share a year ago. On an adjusted basis reflecting the add-back of the noncash impairment losses recorded in both periods, as well as the favorable impact of the Tax Cuts and Jobs Act, which I will further discuss in a moment, our non-GAAP diluted earnings per share would have been $1.13, which represents an increase of $0.41 or almost 57% from the comparable non-GAAP 2016 amount.

Due to its enactment date of December 22, 2017, the Tax Cuts and Jobs Act necessitated the revaluation of our United States net deferred tax liability at the new 21% federal corporate tax rate, which resulted in a benefit of $39.3 million within our 2017 fourth quarter tax provision, which is, in fact, a quarterly tax benefit. The newly enacted legislation also imposes a onetime transition tax to specify foreign earnings which have not been repatriated to the United States. The impact of such transition tax, as well as any future repatriation of cash from our foreign operations, is currently estimated to be immaterial.

We are now on Slide 12. I will now augment Tony's 2017 annual commentary. Consolidated revenues of $7.69 billion are up $135.5 million or 1.8% as compared to $7.55 billion of consolidated revenues in 2016's annual period. Acquisitions contributed incremental revenues of $192.4 million, pertaining to the period of time that such businesses were not owned by EMCOR in the prior year, have positively impacted all our reportable segments other than our U.S. Industrial and U.K. Building Services segments. Excluding the impact of businesses acquired, year-to-date revenues decreased organically $56.9 million or 0.8%.

Consistent with my year-to-date commentary during our third quarter earnings call, significant revenue growth within each of our U.S. construction segments was somewhat muted by year-over-year revenue declines within our U.S. Building and U.S. Industrial Services segments. Despite a $15.9 million headwind as a result of negative exchange rate movement between 2017 and 2016 in pound sterling, our U.K. Building Services segment's strong fourth quarter revenue growth more than offset U.S. dollar revenue declines experienced throughout the first half of the year.

U.S. Electrical Construction revenues or $1.83 billion increased $125.2 million or 7.3%. Acquisitions contributed $50.4 million, resulting in organic revenue growth for 2017 of 4.4%. Increased project activity within the commercial, institutional and health care market sectors, including a significant increase within the telecommunications submarket sector, were the largest contributors to year-over-year revenue growth.

U.S. Mechanical Construction 2017 revenues of $2.96 billion increased $320.5 million or 12.1% compared to 2016. Acquisitions contributed $76.2 million of revenues, resulting in year-over-year organic revenue growth of 9.2%. Higher project revenues within the health care, commercial and hospitality market sectors are the driver of this segment's strong annual organic revenue growth, and this revenue trend has been consistent throughout the last 2 years for our U.S. Mechanical Construction segment.

U.S. Building Services revenues of $1.75 billion decreased $56.5 million or 3.1%. Acquisitions contributed $65.8 million of revenues, resulting in a year-over-year organic revenue decline of 6.8%. This annual revenue decline is due to maintenance contract attrition within both of their commercial and government site-based divisions as well as the lower volume of project activity within the energy sector.

U.S. Industrial Services 2017 revenues of $799.2 million decreased $268.2 million or 25.1% compared to 2016. This segment's annual revenue decrease is due to a reduction in large capital project activity within their specialty field services operations, prolonged weak demand from newbuild heat exchangers as well as the continued impact of Hurricane Harvey in the Texas, Louisiana Gulf Coast region, which has impacted previously scheduled maintenance turnaround work.

Our U.K. segment 2017 revenues increased $14.5 million, primarily due to new maintenance contract awards within the commercial and institutional market sectors, somewhat offset, as I mentioned earlier, by a reduction in small project and capital project activities throughout the year.

Please turn to Slide 13. Selling, general and administrative expenses of $757.1 million represent an increase of $31.6 million as compared to $725.5 million in 2016. This increase includes $24.4 million of incremental SG&A related to businesses acquired, inclusive of intangible asset amortization. As a percentage of revenue, SG&A is 9.8% for full year 2017 compared to 9.6% for the 2016 annual period. The year-over-year increase in SG&A is due to an increase in headcount and related employee costs within our U.S. Mechanical Construction segment to support their strong growth in revenues as well as higher expense associated with company-wide incentive compensation plans due to our overall increased profitability. Additionally, we experienced an increase in employee health care costs year-over-year. Year-to-date operating income is $330.6 million or 4.3% of revenues and represents a $22.1 million increase over 2016's annual performance.

Each of 2017 and 2016 include discrete items that negatively reported -- that negatively impacted reported operating income by $57.8 million in the current year and $6.3 million in the prior year, which we have adjusted for purposes of non-GAAP presentation. Therefore, on an adjusted non-GAAP basis, the year-over-year change in operating income is an increase of $73.6 million, while operating margin increased 90 basis points to 5.1% from an adjusted non-GAAP 4.2% operating margin in 2016's annual period.

All reportable segments are reporting higher operating income and higher operating margins year-over-year other than our U.S. Industrial Services segment.

Our U.S. Electrical Construction Services segment operating income of $150 million increased $48.2 million or 47.4% over 2016 levels and represents 8.2% of revenues as compared to 6% in 2016. This segment generated higher gross profit from commercial, transportational -- transportation and institutional project activities. Additionally, this segment's 2016 operating income was negatively impacted by $98.4 million of losses incurred on the transportation project, which reduced this segment's prior year annual operating margin by 120 basis points.

Domestic Mechanical Construction operating income of $212.3 million or 7.2% of revenues increased $79.7 million, and operating margins increased 220 basis points over 2016's full year performance. The increase in operating income for 2017 was due to an increase in revenues and associated gross profits within the majority of the market sectors in which we participate in. Additionally, 2017 operating income and operating margin benefited from the recovery of certain contract costs previously disputed on a project completed in 2016, which favorably impacted this segment's 2017 annual operating margin by 60 basis points.

U.S. Building Services 2017 operating income of $81.5 million increased $4.7 million or 6.1% due to increased profitability within their Mechanical Services division. Additionally, businesses acquired during 2017 favorably impacted operating income by $2.6 million. Operating margin increased 40 basis points due to an overall improvement in revenue mix year-over-year.

U.S. Industrial Services 2017 operating income decreased $58.8 million to $19.1 million or 2.4% of revenues. The year-over-year decrease is attributable to lower gross profits from our specialty services offerings within our field services operations due to reduced large project activity as well as lower turnaround activities primarily attributable to the impact of Hurricane Harvey, which resulted in a deferral or cancellation of previously scheduled turnaround projects. In addition, operating income was negatively impacted by this segment's shop services operations due to a reduction of pull-through repair activity as a result of the decrease in turnaround projects previously referenced. The substantial decrease in operating margin is due to lower gross margins as a result of an unfavorable revenue mix and higher selling, general and administrative expenses as a percentage of revenues due to unabsorbed overhead costs as a result of Hurricane Harvey.

EMCOR U.K. Building Services operating income of $14.8 million or 4.4% of revenues increased $2.9 million due to an increase in gross profit from service activity within the commercial and institutional market sectors as a result of recent contract awards. This segment's operating income increase was partially offset by unfavorable exchange rate movements of $300,000 during 2017.

We are now on Slide 14, and thankfully for Tony, I'm almost done. Consistent with the reconciliation discussed previously on Slide 10, this page reflects the operating income reconciliation from GAAP to non-GAAP adjusted earnings for those items that we believe are not reflective of our underlying operating performance. Additive to this reconciliation from the quarterly reconciliation previously discussed are the transaction expenses related to the acquisition of Ardent and Rabalais that occurred in 2016.

Adjusted non-GAAP operating income for 2017, reflecting the add-back of a noncash goodwill and identifiable intangible asset impairments, is $388.4 million or 5.1% of revenues. This compares to adjusted non-GAAP 2016 operating income of $314.7 million or 4.2% of revenues, reflecting the 2016 add-backs for transaction expenses and the identifiable intangible asset impairment. The year-over-year improvement in 2017 is an increase of $73.6 million and 90 basis points of operating margin.

The full year tax rate for 2017, as indicated on the bottom of the page, was 28.5% as compared to 37.5% for the 12 month 2016 period. The reduction in our 2017 rate is due to the favorable impact of the necessary revaluation of the United States net deferred tax liability from 35% to 21% as a result of the Tax Cuts and Jobs Act being signed into law during December, as I previously mentioned. Additionally, 2017 benefited from several other favorable discrete tax items that occurred throughout the year. The benefit of these favorable discrete items on our full year tax rate was somewhat reduced by the nondeductible portion of the goodwill impairment previously referenced.

With regards to 2018 planning, I anticipate our effective tax rate will be approximately 27.5% to 28.5% before discrete items compared to our historical normalized rate of approximately 37.5%. This estimated rate incorporates both the reduction to the statutory federal rate as well as the disallowance of previously available tax deductions, including the repeal of Section 199 deduction that is commonly referred to as the domestic manufacturing deduction. This reduction in tax rate will represent an increase in annual operating cash flow of approximately $40 million to $50 million based on our current 2018 taxable income estimates. For purposes of developing our earnings guidance range for 2018, which Tony will speak to in a few slides, we have utilized 28% as a tax rate while we continue to refine our understanding of the new legislation and monitor how state taxing authorities conform to the enacted federal tax law. However, I want to reiterate that discrete tax items may occur during the year and could impact our current estimated tax rates for 2018.

Our current thought process on capital allocation strategy -- excuse me. Our current thought process on our capital allocation strategy has not changed as a result of the Tax Cuts and Jobs Act as EMCOR has maintained sufficient liquidity to execute on all identified areas of capital deployment. Once again, I will let Tony expand on this topic once I have completed the remainder of my materials and I return the presentation to him.

Please turn to Slide 15. Additional financial data on this slide not addressed during my 12-month highlight summary as follows. Year-to-date gross profit of $1.1 billion is higher than 2016 by $109.2 million; while gross margin is 14.9%, which represents 120 basis point improvement over last year. Total restructuring costs of approximately $1.6 million are slightly higher than 2016 due primarily to severance obligations associated with the functional realignment of certain management and support positions within the company. Diluted earnings per common share from continuing operations for 2017 was $3.83 compared to $3.02 per diluted share a year ago. On an adjusted basis, excluding the impact of the noncash impairment loss on goodwill and identifiable intangible assets and the net deferred tax liability revaluation, 2017's year-to-date non-GAAP diluted earnings per share would have been $4.06 as compared to 2016's $3.09 per diluted share, excluding the impact of acquisition costs and the noncash impairment loss on identifiable intangible assets in 2016. The year-over-year improvement in adjusted non-GAAP diluted earnings per share is $0.97, which represents a 31.4% increase.

Please turn to Slide 16. As Tony mentioned, our balance sheet continues to represent EMCOR's strength with good liquidity and modest leverage. Our cash balance increased slightly from December 31, 2016, due to our strong 2017 operating cash flow, offset by funds expended for acquisitions, debt repayment, common stock repurchases, capital expenditures and dividends.

Working capital has decreased year-over-year due to increases in accounts payable and our net billings and excess of cost on uncompleted contracts. The change in goodwill is due to the impact of the $57.5 million noncash impairment charge related to our U.S. Industrial Services segment referenced earlier, net of the impact of acquisitions and related purchase price allocation finalization adjustments made throughout 2017. The increase in net identifiable intangible assets is due to businesses acquired during the year, net of the small tradename impairment loss previously referenced, and $48.6 million of intangible asset amortization expense during full year 2017.

Total debt of $310.2 million is reduced from year-end 2016 due to $100 million repayment made under our revolving credit line in addition to our mandatory quarterly principal payments under our term loan. As a result of the reduction in our outstanding borrowings, our debt-to-capitalization ratio has dropped to 15.6% from 21.6% at the end of 2016.

We closed 2017 with another quarter of excellent cash flow conversion and go into 2018 at an extremely strong position. We will not waver from our disciplined risk assessment and look forward to the opportunities in front of us.

With my portion of the formal slide presentation concluded, I will actually return this back to Tony. Tony?

You deserve a drink of water. I'm going to cover Page 17 here, and it's backlog by market sector.

Total backlog at the end of the year -- year-end 2017 was $3.79 billion versus $3.90 billion at the end of 2016. We have a few moving parts here. We completed -- we nearly completed some large few processing jobs that actually accelerated at the end of the year. We are very confident that we will replace those, but it tends to be episodic as we do -- we're in negotiation on several nice projects right now.

The market has continued to be active as positive economic growth supports increased nonresidential construction activity. If you look at the AIA Consensus Construction Forecast, it says 4% nonresidential growth for the markets we are in. In '18, that feels about right to me. When you focus on the market sectors, our commercial project backlog was up 19% or $215 million year-over-year, which is very good for us, and it's a very -- it's a nice sweet spot for us.

Commercial projects represent us over 40% of our total backlog, and our early read on this for this year is it should continue to be as mid-single-digit growth trajectory throughout 2018. Continued construction of data centers, high rise and mixed-used residential and significant tenant fit-out projects remained strong contributors to the commercial sector's projected growth in 2018. We did have 2 large food process projects reached substantial completion, and we delivered for our customers. These large, multiyear food processing projects account for the majority of the decrease in our industrial backlog, and we also burned some backlog on a number of Northeast transportation infrastructure projects. We continue to see opportunities in both food processing and transportation infrastructure as we move through 2018 and into 2019. Overall, our markets remain active. Bidding activity is strong. And we remain -- and we will remain disciplined with respect to project pursuit, resource planning and allocation and then, ultimately, project execution.

I'm on Page 18 now. This is backlog by segment. Using a little rough math, total backlog for -- due to domestic construction segment is down about $200 million. The backlog for the Building Services, Industrial Services at EMCOR U.K. segments is up about $100 million collectively. Again, this is a story of large projects versus smaller projects. Very large projects are a little more episodic for us, and we have burned some of this work on our construction segments, as I had just mentioned. We do see really, really good opportunities to complete -- replace that work, but rarely do they sequence perfectly a completion to start-up of the next activity. Conversely, our U.S. smaller project backlog ranging between $250,000 to $5 million is very strong. We are also seeing strong demand for some semiconductor work that may or may not move through backlog as it may be contracted in a different way that doesn't allow us to put it in backlog as a fixed priced job. We closed the year with backlog in our domestic construction segments to $2.8 billion. In my opinion, domestic construction segments revenue was up over 10% year-over-year, and backlog is pretty close to where we started. It really equated to strong performance in a pretty good market. These segments are executing and converting at extremely high level right now. They are doing it throughout the project life cycle, and what a terrific year we had and will continue to have. Building Services backlog grew during the year, which was nice to see. And it realign with the increase in our commercial sector activity, and it's driven by our Mechanical Services business, although we did have some new contract wins in our commercial site-based business. And we continue to see small and retrofit projects across our Mechanical Services companies. We expect the new tax law to help because that, coupled with the desire for more energy savings and the efficiency to replace, will drive replacement demand throughout 2018 and '19.

Look, the industrial backlog is up $12 million. It looks like a big number because it was only $50 million. I'll remind you that most of our work in the segment is a timing material base. This is the shop work. Pricing is still not great, and clearly, we would have taken an impairment charge if we thought there was a big spike in pricing. The other thing that's happening here is we have headwinds as really we're not servicing some of our customers in the Latin America market for new heat exchangers, and there's a lot of reason why, mainly because Venezuela is not healthy right now. We continue to win some good contract awards in U.K., and backlog has continued to tick up.

In summary, bidding opportunities are good, and we see a lot of good demand, and we will continue to perform well.

I'm now on Page 19 through 20, and it's probably the reason most of you called in today. We will guide to $4.10 to $4.70 in earnings per diluted share from continuing operations for 2018. This earnings per diluted share guidance incorporates an estimated 28% post-tax reform tax rate. We expect revenues of $7.6 billion to $7.7 billion.

We expect continued growth in the nonresidential construction market, decent demand for our government and commercial site-based services, our strong energy retrofit market and a choppy and less predictable market with respect to our downstream refining and petrochemical markets. We do expect more clarity in the downstream refinery and petrochemical markets as we approach mid-2018 for both the fall turnaround season and into 2019.

[Hard to process] some unpredictability in this market. It's always had a level of uncertainty as maintenance goes, expand and contract. And of course, capital planning tends to be the swing resource for us as we tend to be the swing resource on large capital projects in this segment. As always, we provide a view -- we will provide a view on what needs to happen for us to move the top end of our guidance range. We need the U.S. construction business to perform at the high level -- at a high level in our U.S. construction segments.

We do have some headwind as we benefited from some significant claim and dispute settlements 2018, as Mark discussed, and it's in our 10-K. However, we are performing well in a strong market, and we expect to continue to perform well in 2018. We will have our work cut out for us performing at the 2017 operating income margins 2018, but we do expect strong operating income margin performance.

Our U.S. Building Services segment should return to revenue growth in 2018, and we need to implement our site-based contract wins well, continue to grow our Mechanical Services business and execute well for our Department of Defense and some other federal agency customers as they repair their facilities that were impacted by sequester. Now that the reprioritization of their budget has happened with the new 2-year budget, we should continue to see operating income margin expansion in this segment in 2018.

Our Industrial business segment will improve from 2017 to 2018, but it will be weighted to quarters 2 through 4. We had a very strong first quarter in 2017 with respect to our field turnaround services. It was our strongest on record since the acquisition of RepconStrickland. We do see demand strengthening for us as the year progresses. And as Harvey decimated this sector in Q3, in Q4 of 2017, our comparisons are much easier. For us to move to the top end of our guidance range, we will need some increased scope or some unplanned event, we don't have as of today, and that is certainly possible as these unplanned events have happened more than a few times for us over the last 10 years.

Our U.K. business will need to continue to grow and progress that we have earned over the last 4 years.

We expect to continue to have decent cash flows at least equal to net income. We will look to use our cash and balance sheet, as Mark said, to grow organically and through acquisition, and we'll invest in any of our domestic segments through acquisitions. We will return cash to shareholders this year through buybacks and dividends. We would prefer buybacks versus dividends for any incremental return of cash to shareholders.

We like how our businesses are positioned, and we think we performed exceptionally well in 2017, and we expect to continue to deliver for our shareholders in 2018.

And with that, turn it over to you for questions.

(Operator Instructions) Your first question comes from the line of Tahira Afzal with KeyBanc Capital Markets.

So I guess, I know you guys always start the year off with a conservative guidance, and that's in your tradition, and it seems to have serve you well. I was a little surprised at the width of the guidance. And while the top end seems in line with your tradition, I guess, the low end surprised me. It seems pretty low. I would love to get an idea of really how your picturing what scenario would that happen under.

I think that happens under we don't rebuild backlog through the year, and the industrial business has weaker performance than we would expect rebounding from Harvey in quarters in 3 and 4. It's a pretty uncertain market. I think that's the swing factor for the year. And then remember, we've got to recover with about 20 to 30 basis points overall, Mark, then our overall margins benefited from some of the claim settlements in 2017.

Got it. Okay. And then I guess if I'm looking at the industrial sector, I mean the readthrough from a lot of the industrial sector and earnings have been pretty positive. Do you see what you're seeing just sort of a transient headwind just based on your comps? Or as you look beyond to see, how do you think there are some serious issues as well? Would love to get your sense directionally on what you think is going to happen.

In the Industrial segment, you're talking about the business we do in our segment, not the broader industrial economy?

That's what I mean.

Yes. Look, I think we're well positioned for a long period of time. I think we're in a pause period in here, fourth quarter and a little bit in first quarter. I think there has been unpredictability brought in. We have premiere assets in that sector. I'm not as bullish on the shop services returning to where they were. But look, I think as we move into late '18 into '19, it'll be fairly positive. I would say that when you look at the read throughs on some of the others collectively, we've been more right and wrong on what we see. And others tend to -- a few others in this segment, that do business in our segment and the industrial segment tend to get a little bullish a little too early when there's been a change of events.

And your next question comes from the line of Noelle Dilts with Stifel.

Just first wanted to explore this idea of labor constraints a little bit, which you said are getting a little bit more difficult. How do we think about the impact there? On one hand, theoretically, it's the private labor you should be getting some pricing. On the other hand, obviously, the lack of availability of labor can limit growth. So can you just give us some more thoughts on how to think about that?

Well, I think skilled labor, if you look at where the unemployment rate is, skilled labor is going to be a challenge. Now I would say when you take us versus other contractors, we're more prepared to meet that challenge. I say this stuff a lot, but I believe it because I go see the field a lot, I talk to people, and I know what the folks that actually do the work care about. We're an employer of choice because folks know they're going to get paid every week. They know they're going to be kept safe. They know that they're going to be led by people that actually know the work. And finally, they know that if they do well, there's a good chance of follow-on work for them, which is what they care about. Now if you take it overall what are you doing to replenish, we've gotten more creative as have other people. We worked in the nonunion world to expand our training and the resources we'll bring in at a lower level. In the union world with some locals, not all locals but most locals, have a lot of these different classifications to bring people at a lower level and move them into journeymen. On the union side, on specific trades like sprinklers. We've had pretty good success transitioning nonunion sprinkler fitters to union sprinkler fitters. And on the nonunion side, I go back to my first point, it's even more important that those 4 things be met than on the union side. Because in union side, a lot of the employers would have that. The other thing is it's not just the skilled trade. It's also your supervision from foreman through superintendent to project manager. One of the benefits we have versus other people is our project side can flex. Because of the variety of trade we have, we can take more scope, and that doesn't necessarily mean, at least the top 2 levels, the superintended and project manager level, need to increase so we can get more leverage there. And about pricing, I mean pricing is moderately better. But I would argue that when you get to the larger projects especially, you're working with your customer to understand the budget that they have and the options they will have within that budget and what you can afford to do the work for. So pricing flexibility actually decreases on the very large projects because you work as more of a team to deliver the value for your customer.

That's really helpful. My second question, just shifting over to thinking about the impact of tax reform. As we look at some of the incremental cash coming through, is there really any shift in how you're thinking about deploying that cash in your priorities?

I would say no. We've been pretty good allocators of capital. And Mark, can you expand on that?

Yes. And, Noelle, as I mentioned in my commentary, the incremental cash, albeit I like to have an incremental $40 million or $50 million, once again, doesn't really change how we think about it. And yes, we're going to continue to execute in the manner that we have been for the last several years.

Okay. And then last question. When you think about just generally the nonresidential construction market, I think we've talked before about a little bit of softening in some of the very early cycle verticals like office and hotel. Is that something you guys are seeing? And then second, how are you guys thinking about, at this point, the potential for Infrastructure Stimulus bill and how EMCOR might benefit?

The forecast is still there for pretty good growth in 2018. We believe that. As far as the office market, there are still a lot of retrofit going on and tenant fit-out. There are some spec office building construction. I mean you saw today that JPMorgan Chase has announced a new 70-story tower in Midtown Manhattan. So I think there's a lot of repurposing, a lot of rethought to some of these buildings that just don't fit the needs for people have today. And you got to think about there were some distortions that happened with some of these large campus projects over the last couple of years that on their own can bring down demand for office construction like the Apple Campus. When that's not being billed anymore, that can have a sizable impact on what you view as the overall office construction market and some of the other work in Silicon Valley where the new campus [site]. But on the other side, we're repurposing all the buildings that they were in because of the capability that a company like us have. Hotel, I mean we don't play in the lower end of the hotel market. As far as the higher end of the hotel market, there may be life coming back to Las Vegas, which would be a good thing for us. There are some nice projects onboard that look like they're going to come out of the ground in San Diego. So I think you got to be much more specific when we think about the market and then just overall categories because some of those categories wouldn't be work that we would do anyway. So I'm fairly optimistic. And then the other market that we play in that we see strong demand hopefully in '18 and going into '19 is high-tech semiconductor. We see that in a couple of places or footprint in the U.S. right now.

And your next question comes from the line of Adam Thalhimer with Thompson, Davis.

I wanted to ask first -- and maybe I shouldn't overthink this because I know you guys like to start the year with a conservative guide, but I'm just trying to parse through the revenue guidance of basically flat to down for this year. If U.S. construction is up mid-single-digits, Building Services is up, Industrial starts to grow in Q2, I just don't know how you get to down revenue this year.

Yes, I wouldn't overthink it too much. But the way I think about it is we have to think about revenue that way because we know we start the year down, maybe just taking everything being equal, $65 million to $100 million based on our backlog beating down in construction $200 million. So we've got to replace that revenue through book-and-ship business in 2018, which obviously we think we can do because our guidance is $7.6 billion to $7.7 billion. The other thing is we are expecting to book some large project work through the middle of the year. If we do that, you'll see backlog maybe go up.

And might not revenue, no.

But you won't see much revenue probably this year. That will be more of a '19 and '20 phenomenon.

Got it. Okay. That was my next question, the timing of backlog growth. So you think it's more midyear?

And this could be a year like 2012, too, where we're starting to see revenue go okay at decent velocity because there's more small project work. In 2012, we had a large project -- a large food process project that never made its way into backlog. And it -- when it finally did, there wasn't much left. And we have a couple of projects that we could be working on here starting late April, early May that could have the same characteristics as the customers decide that they want to get moving and want to do it more on a fixed period in time and material basis, which will lead to revenue burns. But maybe no work will go into backlog, which you should take pretty comfort in, in some ways because that means we were being very careful on with contracting terms we would take, and the market is allowing us to do that right now.

And, Tony, that was the semiconductor job you mentioned?

It could be that and other high-tech work. There's a -- that's a semiconductor but other high-tech work. There's a window right now, where they want to lock in the resources and they may not want us -- and months trying to get scope so fixed that we can give them a fixed price.

Okay. And then yes, lastly, I'm sorry to hammer this, I mean you're just generating so much cash, and I would assume M&A multiples are still high. I mean should we just -- I guess you can end 2018, probably go into '19 with no debt if you wanted to.

We can pretty much do that close to now. We do see opportunities. I'm not that negative on the M&A market now. We did 3 nice deals. Last year, Mark, what was the total purchase price? $170 million?

Yes, it was...

So it wasn't insignificant when we did it. Mark is getting the exact number. It wasn't insignificant what we did. We see deals like that again this year. I'll tell you what we're not going to do. We're not going to do something that we know we can't create value for our shareholders over a 3- to 5-year period.

$107 million.

$107 million?

$107 million.

$107 million, yes, $107 million. So we did that. I would expect we'd do that a little more this year. You just quote what we're looking at today, hopefully a little more. I think owners that we talk to are still sorted on tax reform. Some of the Subchapter S provisions are pretty favorable. They may decide not to sell their businesses. That doesn't change some of the issues they have with estate planning and everything else. The other thing is private equity is still very active and still -- I mean they must know something we don't know other than debt. But some of the things they bid on, the prices they bid on, don't make a lot of sense to us. But when they sell it to each other, I guess it doesn't make sense. And so we're just going to keep doing what we do. We have a list of things that we'll be working on. And that place order could be, just in a normal year, between $100 million and $200 million. And in a bigger year, we've done deals up to $450 million. I'm not -- I don't think this management team is sort of the giant transformational M&A guys because we haven't seen that work in our space in any significant way. It has to. Things we look for: strength in the trade that we're in, strength in the geography we're in, strength in the line of service we're in, transform one of our segments lines of business with the idea that we would go out and say, "Let's take 2 light companies and put them together." Quite frankly, there's not a lot of SG&A savings, and 1 plus 1 really equals 2.

Your next question comes from the line of Brent Thielman with D. A. Davidson.

Tony, a lot of things has kind of developed here since the last earnings call between kind of tax code changes, inflation becoming a bigger topic. I'm just curious if you've seen that lead to any sort of hesitation to move projects forward in the market at all on a shorter-term basis?

No. In fact, quite the opposite.

Okay. And then on the public sector backlog, kind of setting aside those select larger projects, which obviously caused some lumpiness there, has the general level bid activity and kind of momentum in that market or sector continued to expand?

Yes.

And there are no further questions at this time. I'll now turn it back to management.

Look, we had a fantastic 2017, and that's really a tribute to the 34,000 people that are out there working for EMCOR every day. We have the best skilled trades people. We have terrific supervision. We have local leaders and CEOs that run these companies exceptionally well and a great segment and corporate leadership team. We're going to deliver again in 2018, but we're going to be measured and thoughtful on how we do it. We look forward to seeing you all out there, and thank you for your interest in EMCOR. And everybody, have a great day.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.