Jul 25, 2013
Executives
Nathan Elwell R. Kevin Matz - Executive Vice President of Shared Services Anthony J.
Guzzi - Chief Executive Officer, President and Director Mark A. Pompa - Chief Financial Officer, Executive Vice President and Principal Accounting Officer
Analysts
Richard Wesolowski - Sidoti & Company, LLC Alexander J. Rygiel - FBR Capital Markets & Co., Research Division Adam R.
Thalhimer - BB&T Capital Markets, Research Division Steven Folse - Stifel, Nicolaus & Co., Inc., Research Division Nicholas A. Coppola - Thompson Research Group, LLC John B.
Rogers - D.A. Davidson & Co., Research Division Saagar Parikh - KeyBanc Capital Markets Inc., Research Division
Operator
Good morning. My name is Tunisia, and I will be your conference operator today.
At this time, I would like to welcome everyone to the EMCOR Group Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I will now turn today's conference over to Nathan Elwell of FTI Consulting.
Mr. Elwell, you may begin your conference.
Nathan Elwell
Thank you, Tunisia. Good morning, everyone, and welcome to the EMCOR Group Conference Call.
We're here to discuss the company's 2013 second quarter results, which were reported this morning. I would now like to turn the call over to Kevin Matz, EVP of Shared Services, who will introduce management.
Kevin, please go ahead.
R. Kevin Matz
Thank you, Nathan, and good morning, everybody. I have to report a first for us though after doing this about 60, 65 times.
Right before we went live, our fire alarm just went off in our building. We believe it's a drill, so we're going to go forward.
But to the extent that the fire marshal throws us out of the building, we'll stop at that time, and we'll reschedule. So hopefully, everything will go according to plan.
Anyway, welcome to our conference call for the second quarter of 2013. For those of you who are accessing the call via the Internet, on our website, welcome.
Hopefully, you're at the beginning of the slide presentation that will accompany our remarks today. Please move to Slide 2.
With me today to discuss the quarter are Tony Guzzi, our President and Chief Executive Officer; Mark Pompa, our Executive Vice President and Chief Financial Officer; Mava Heffler, Vice President of Marketing & Communications; and our Executive Vice President and General Counsel, Sheldon Cammaker. For call participants not accessing the conference call via the Internet, this presentation including the slides will be archived in the Investor Relations section of our website under Presentation.
You can find this at emcorgroup.com. Before we begin, I want to remind you that this discussion may contain certain forward-looking statements.
Any such statements are based upon information available to EMCOR management's perception as of this date, and EMCOR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.
Accordingly, these statements are no guarantee of future performance. Such risks and uncertainties include, but are not limited to, adverse effects of general economic conditions, changes in the political environment, changes in the specific markets for EMCOR services, adverse business conditions, increased competition, mix of business and risks associated with foreign operations.
Certain of the of risks and factors associated with EMCOR's business are also discussed in the company's 2012 Form 10-K and in other reports filed from time to time with the Securities and Exchange Commission. And With that said, please let me turn the call over to Tony.
Tony?
Anthony J. Guzzi
Thanks, Kevin. And I'm going to be on Page 3, and I will be covering Pages 3, 4 and 5.
As we operate in 2013, we are still in uncertain and choppy markets. And we are continuing to execute well and focus on the areas we have the greatest opportunity to grow the company and provide returns to our shareholders.
I thought before we delve into the quarter and got specific about the numbers and we have some add backs with pro formas, I thought I would step back and talk about the important actions and some important trends as we seeing in the business. First, our domestic backlog is up 9.4%.
With our construction operations up over 15% and EFS is down a little due to the portfolio reshaping we talked about in our first quarter call that we executed in Q4 2012. It makes sense for us to focus on the domestic backlog, as we are withdrawing from the U.K.
construction market, and that withdraw distorts the overall number as far as backlog growth and composition. It's good for us to be shrinking in the U.K.
right now as we withdraw from the construction market. What we did here through the first 6 months of this year and what we've been doing, really, a lot of action in this quarter, is we took important access to position our company for the long term.
We take it as a given that the market is going to be choppy and uncertain. Until we get them, we have to take the actions that we can do to build value for the long term.
First, we will be closing on the purchase of RepconStrickland in the next week. And with that transaction, we are really positioned to produce exceptional results for our customers in the refinery and petrochemicals space.
We believe, as most people believe, that market has a great long-term fundamentals for our country, and therefore, that market has long-term great fundamentals for us here at EMCOR. Second, instead of a multi-year phase withdrawal, we use words like downsizing and reshaping, and shrinking and resizing.
To be clear, we are withdrawing from the U.K. construction market completely.
We will be substantially complete with that withdrawal this year and with the restructuring of that business. This withdrawal from the U.K.
construction market is one of the best restructuring and improvement opportunities that we have had at EMCOR. And we finally saw the window when we're able to execute it in an affordable manner.
It will have a 2- to 3-year payback, at most, and in anybody's book, that is a good investment. EFS continues this margin improvement.
And on a year-to-date basis, it's performing at 4.9% operating margin despite the headwinds in our EMCOR Government Services business, from sequester and the inability of our government customers to make routine decisions. This purchase of RepconStrickland, the continued improvement in EFS, and our withdrawal from the U.K.
construction business will all have a positive impact on our margins on a go-forward basis. And underneath that, providing a foundation, like it has for a long time, is the continued strong performance of the -- our electrical construction and services segment.
7.5% operating margins in the quarter. In the mechanical segment, we didn't perform where we wanted to, but that is isolated to 2 projects, and Mark is going to go through the detail.
But when we add that back, worth about 5% operating margins, which is pretty good performance. That performance in mechanical segment on those 2 projects is the only negative in the quarter.
It's isolated to 2 projects, one a DOE project, the other one an industrial project. On the DOE project, we have a customer that continues to extend time and can't make a decision.
We recognized the full loss and we took no credit for any claim that we may have. We do believe we have an ability to gain some, but that's not how we do it here.
On industrial project, quite frankly, we had a subcontractor that couldn't perform, therefore we had to step in and complete the work ourselves because it's a customer we want to do business with them in the long term, and we owe it to them to get the job right and get it done on time. Those 2 projects cost us $10.9 million in the quarter.
We do expect mechanical operating margins in the second half of the year to get more back to the run rate that we expect. Now with that backdrop, let me talk about the quarter.
And I'm going to talk about it and more to high-level market into the -- the reconciliation of GAAP to pro forma. Except the revenues, my discussion will be on a pro forma basis.
Revenue's about where we expected them to be on a year-to-date basis. We said that we'd grow about 2.5%.
We shrunk it a little bit in the quarter. The way I look at it, most of it was because of the U.K.
downsizing. If you look at the construction operation, it basically leveled off within a couple of million dollars as mechanical shrunk due to the timing of industrial projects that we had fast tracked in the first half of last year.
And electrical grew, and that growth was fairly broad based. The mechanical work we have is more pushed to the back half of this year.
And we had really tough comparison in the first part of last year because of what I just talked about. On an EPS basis, when accounting for our deal cost, the U.K.
restructuring and the loss on the U.K. construction operations, we were at about $0.48 a share.
On a year-to-date pro forma basis, we're at $0.98 a share, and again, on a pro forma basis for the quarter, 3.3%, and on a year-to-date, 3.4%. Cash flow was improved over the year-ago period at $41 million, and we expect good cash flow for the year.
we have a little bit of caution in there because we're bringing in a new business and RepconStrickland. We think it has the same characteristics as Ohmstede.
But again, in the turnaround business, you never know what that strata will be at the end of the year. We have a strong balance sheet, and we will continue to have a strong balance sheet, even after we enclose our acquisition of RepconStrickland.
Overall, this was a busy and transformative quarter, with many positive actions that will position us well for the long term. Bottom line, we had a bump on the road in 2 mechanical projects.
It's a good team. It will continue to be a good team and will continue to execute well.
And with that, I will turn it over to Mark.
Mark A. Pompa
Thank you, Tony, and good morning to everyone participating today. For those participating via the webcast, we are now on Slide 6.
As with past quarters, I will begin with the discussion of our second quarter results before moving to year-to-date key financial data derived from our financial statements, included in both our earnings release announcement this morning and our Form 10-Q, which was filed with the Securities and Exchange Commission as well this morning. Consolidated revenues of $1.56 billion in the quarter are down 2.1% from 2012.
While reporting segments other than U.S. Electrical Construction Services, reported revenue declines during the second quarter.
Domestic electrical construction revenues increased 13.7%. Domestic mechanical construction quarterly revenues decreased 6.8%, facility services quarterly revenues were flat, and our U.K.
segment revenues decreased 22%. Revenue growth within the domestic electrical construction segment can be attributed to increased project activity within the quarter, and the commercial industrial and institutional market sectors.
Revenue declines within our domestic mechanical construction segment are due to reduced volumes within commercial and house care, as we were active on certain large projects during 2012 that were substantially complete prior to the start of the current year. Our facility services segment revenues were essentially unchanged between quarterly periods, as revenue increases within our mechanical and energy services divisions were offset by revenue declines in our commercial site and government service offerings.
Reduced levels of indefinite duration and indefinite-quantity project opportunities within Government Services and a strategic reshaping of our commercial site business project portfolio offset revenue gains elsewhere within this segment. Industrial services revenues were flat between each second quarter period.
Consistent with my last 2 quarterly commentaries, the decrease in revenues from our U.K. segment is the result of our continuing plan to deemphasize our engineering and construction operations, which has culminated in our announced withdrawal from such activities in prospective periods.
Please turn to Slide 7. Selling, general and administrative expenses increased $1.9 million within the quarter, inclusive of $1.4 million of transaction expenses pertaining to our pending acquisition of RepconStrickland.
As a percentage of revenues, SG&A in quarter 2 is 9%, which represents a 30-basis-point increase from last year's quarter 2 SG&A percentage of 8.7%. Operating income of $36.1 million, represents 2.3% of revenues and compares to $56.3 million of operating income and 3.5% of revenues in 2012 second quarter.
All reporting segments, other than U.S. electrical construction and our facilities services segment reported declines in operating income quarter-over-quarter.
Our U.S. Electrical Construction Services segment operating income increased $2.8 million or 12.6% over quarter 2 2012, with an operating margin of 7.5% or 10 basis points less than last year's 7.6%.
The increase in operating income and absolute dollars is due to higher volumes, while the minor decrease in margin can be attributed to current project mix. 2013 second quarter U.S.
mechanical construction services segment operating margin of 3.1% is due to a $11.3 million decrease from last year's quarter as a result of $10.9 million of losses attributable to 2 projects from an operation in the Southeastern United States. The operating margin decline is 160 basis points from the 4.7% reported in quarter 2 2012.
And if the aforementioned project losses were excluded from this segment's quarterly performance, operating margin would have exceeded 2012's quarterly margin, which is more indicative of the profit characteristics of projects in our mechanical backlog. Our facility services segment operating income increased $4 million or 25% over quarter 2 2012, with an operating margin of 3.8% or 80 basis points greater than 2012's quarter 2 margin of 3% and is representative of higher project margins within our mechanical and energy services divisions than on a comparable quarter.
EMCOR UK is reporting an operating loss of $4.5 million or negative 4.2% of revenues within the quarter, which represents an $8.5 million decrease from the 2012's quarter 2 results due to losses within their engineering and construction operations, from which we have announced our withdrawal. EMCOR's operating income was further burdened by $5.8 million of restructuring expenses, which are predominately U.K.-focused as we withdraw participation in the engineering and construction markets.
As previously mentioned, our quarter 2 SG&A expenses included $1.4 million of transaction expenses incurred in connection with the pending acquisition of RepconStrickland with additional expenses to come in quarter 3. We are now on Slide 8.
The table on this slide lays out those items impacting our second quarter and year-to-date results, which we believe should be excluded from EMCOR's reported operating income to provide better comparability. Each of these items have been addressed in today's commentary, and for the sake of completeness, once again, are as follows: transaction expenses related to the pending acquisition of RepconStrickland of $1,361,000, losses generated by EMCOR's U.K.
engineering construction operations of approximately $8,023,000, and restructuring expenses of approximately $5,801,000 pertaining to reductions in workforce, as well as cost associated with idled real estate as a result of strategic changes in our EMCOR U.K. segment.
The effects of the aforementioned adjustments amounts to adjusted operating income of $51.3 million or 3.3% of revenues for the quarter ended June 30, 2013, as compared to $57.1 million or 3.7% of revenues for the corresponding 2012 period. With regard to the year-to-date period ended June 30, adjusted operating income for 2013 is $107.8 million or 3.5% of revenues as compared to $104.4 million or 3.4% of revenues in 2012.
Our income tax provision for the quarter is reflected as a tax rate of 38.5%, which is comparable to the rate for 2012 second quarter. Cash provided by operations for the second quarter was $42.9 million, which represents an improvement of $21.4 million over cash provided by operations during 2012 second quarter.
And for the 6-month period and the cash used in operations is $52.2 million compared to $10.6 million of cash used in operating activities for the year-to-date 2012 period. Please turn to Slide 9.
Additional key financial data on this slide not addressed during my highlight summary are as follows: quarter 2 gross profit of $181.5 million represents 11.7% of revenues, which is down $12.4 million from the comparable 2012 quarter, attributable to those losses disclosed within both our U.S. mechanical and EMCOR UK segments.
Total restructuring costs were $5.8 million, and as previously discussed the, majority of this amount pertains to United Kingdom activities. Diluted earnings per common share for the quarter is $0.31 compared to $0.49 per diluted share a year ago.
And on an adjusted basis, reflecting the add back of transaction costs associated with the pending acquisition, the losses incurred within our U.K. construction and engineering operations and associated restructuring costs, diluted earnings per share would be $0.48 per share for 2013 as compared to $0.50 per diluted share in 2012 second quarter.
Please turn to Slide 10. I will now discuss the results for the 6-month period ended June 30, 2013.
Revenues were essentially flat at $3.1 billion for both year-to-date periods, with strong revenue growth within our domestic electrical construction segment and facility services segment, being muted by revenue declines within both our domestic mechanical construction and EMCOR UK segments. Year-to-date gross profit of $372.7 million, which is lower than the representative 2012 period by $2 million, is only 10 basis points less than the margin basis at 11.9% of revenues, despite negative project activity within EMCOR's U.K.
construction operations in the the U.S. mechanical construction segment.
SG&A expenses of $278.1 million represents 8.9% of revenues compared to 8.7% of revenues for the corresponding 2012 period. Year-to-date operating income is $87.4 million or 2.8% of revenues, which represents a $15.1 million decrease over 2012's year-to-date performance.
As previously disclosed on Slide 8, this presentation adjusted operating income reflecting the add back of transaction costs associated with the pending acquisition, the losses incurred within our U.K. construction engineering operations and associated restructuring costs for both year-to-date periods would be $107.8 million for 2013 as compared to $104.4 million for 2012, which represents a 3.2% increase year-over-year.
Diluted earnings per common share was $0.75 for the 6 months ended June 30, 2013, compared to $0.89 per common share on the corresponding 2012 period. On an adjusted basis once again reflecting the add back of transactions expenses associated with our pending acquisition, losses incurred by EMCOR's U.K.
engineering and construction operations, as well as restructuring expenses, year-to-date diluted earnings per share for 2013 would be $0.99 as compared to $0.92 per share in 2012. Please turn to Slide 11.
EMCOR's balance sheet, as Tony mentioned, remains strong, with sufficient liquidity, as represented by our $530 million of cash, which is available to meet our current working capital requirements, as well as our organic and strategic investment opportunities. The increase in working capital from year-end 2012 levels is driven by higher accounts receivable balances as a result of increased volume during the second quarter within certain of our domestic operations.
Changes in identifiable intangible assets between periods is primarily due to amortization expense recorded in the year-to-date period, and our total debt is essentially unchanged since the end of last year. And our debt-to-capitalization ratio remains low at 9.93%.
This obviously will change next quarter when we close the RepconStrickland transaction. EMCOR continues to do a good job of managing all the risks inherent in all of our businesses, and I believe it's clearly reflected in our balance sheet, as it has been in past periods.
With my overview complete, I would like to return the presentation to Tony. Tony, go ahead.
Anthony J. Guzzi
Thanks, Mark. We're now on Page 12.
I'll spend a little bit of time on backlog, and Page 12 -- this page is a little different than you're used to seeing. On the left-hand side of the chart you'll see total backlog.
On the right, we're talking about domestic. If you look at total backlog, we're up 6.9% or $227 million.
And all of the increase is organic. But really, what's going on in the U.K.
and our complete withdrawal from the U.K. construction market, you can see that's down, and that will continue to drop until we just get to stasis on our facilities business.
Let's go to the right-hand side and look at the domestic market. You look down at the blue, and what you'll see is EFS is down $40 million.
We foreshadowed that in our earnings call, 2012 year-end earnings call, where we talked about what was going on with our portfolio reshaping of the site-based business. We had a large contract and a couple of smaller ones that weren't profitable.
Went back to the customer that we need to do X to make this work for both of us. We decided to part ways.
That's a good outcome for margins long term and allows us to focus in more positive directions as we discussed. The good news on this page, and it is good news, is we've had a sizable increase in our domestic construction backlog of 15.6%.
And in the Q this quarter, you'll now see a more detailed disclosure on backlog and invite you to look at that. So backlog is up 9.4% domestically and you can see the components of it.
Here in the states, U.S. construction base backlog increased $326 million, with both mechanical and electrical segments experiencing double-digit growth.
That's good. And again, we continue to shed the U.K.
construction backlog. With that I'd like you to turn to Page 13.
Since December, backlog has increased $335 million. And switching to market sector for a moment on the graph, and again we're on Page 13, you saw increases in industrial, transportation, water & wastewater, and commercial and healthcare are basically holding level for the 6 months.
Institutional backlog has discrete -- decreased $82 million or 8%. And as I mentioned earlier in my remarks, we know that a portion of this decrease is a direct result of sequestration and the financial gridlock in Washington.
One may ask why are we seeing it a little quicker than other defense contractors? We are more in the operating, and we're in the budget that they can touch nearer and dearer and quick.
Some the projects keep going, others have been slowed. I will tell you, it's as difficult of an environment to negotiate request for equitable adjustments in change orders, as I have seen.
And they direct you to do the work. I should get paid.
We will get paid, but it is very difficult right now to get resolution. We're very bullish on the government sector long term because we think this will lead to more consolidation, and we'll be able to do more maintenance for the government.
And we think eventually, this sequestration will lead to more outsourcing. But it's a tough time right now.
We have a team that's focused on it, and we know how to keep our cost in line while we go through this. When you look at other components of the backlog, you look at commercial, hospitality and industrial, it's about half of what we're doing right now, which compares to about 44% in the year-ago period.
And that's good. They've grown about 17% since June of '12.
Industrial backlog's at an all-time high with $705 million, and it's comprised of food processing, tire, paper plant and power-related projects. Just as a note, the only part of our refinery business that's in backlog is really the shop services part of it, where we have a firm commitment.
And when we say shop services, that's really for the new build or significant rebuild. It's not for any of the repair work we do in those shops, and it's really none of the turnaround work, or very little of it that we do in Ohmstede Industrial Services or soon RepconStrickland will be in backlog.
It's work that -- we know what the scope's sort of, that scope expands and contracts based on what we find when we get into the refinery. And most of that work is done on a fixed fee time and material or time and material basis.
And we've talked about the cash flow characteristics of that, too. We're paying the people every week, and we're usually 30 to 60 or more days in arrear.
The other thing about backlog that's important, and we always remind people of this, right? We only put in the backlog what is a fixed-service agreement for one year or a fixed-price contract or approved change orders.
We don't make any guesses on what IDIQ work will be. We don't put multi-year contracts in here.
And We certainly don't put unapproved change orders in here. So our backlog is what we have the customers commitment for us to work on.
Transportation is up this quarter. We have a couple of bridge-lighting projects we're working on.
And water & wastewater grew since the end of '12. Our commercial, the reality is it's actually up both year-over-year and sequentially from December, when you adjust for the service agreement that we took out of the site-based business.
We have a book-to-bill of over 1 year-to-date. And in the quarter, it's a little bigger than that.
It's about 1.1. We're seeing it work across the portfolio, with the exception of some institutional work.
And I believe the economy is trying. I think it's trying to get moving.
But I think, you know us well enough, that we are not going to hide behind that as an excuse, and we're always going to focus on the things we control. All that being said, let's go back.
15.6% construction backlog growth. EFS holding firm with a better mix, a new acquisition coming in at RepconStrickland, that's in a great space, and getting the U.K.
behind us and shedding what's been nonproductive backlog since the existence of EMCOR. I think a lot of good things happening on these 2 pages.
With that, I'd ask you to go to Page 14 and 15. When I look at where we are year-to-date, we're about where we expected to be.
The only difference is instead of downsizing, reshaping, resizing the U.K., we decided to do a complete withdrawal from U.K. construction market because we saw the opening.
And it got to a place where it was affordable on a restructuring basis, and yes, some of the losses are accelerated as we move work to subcontractors, and we have to take some of the work on the WIP that we started. But most of those losses, or why they're a little bigger than we might have expected, is because once you make the decision to exit, there's a lot of unproductive time when you exit the U.K., just like the rest of Europe, U.K.
is a little better or Canada. And we have a lot of unproductive time, we get more people that you knew to actually do the job, which is very different than what we've experienced here.
And out of the exception of those 2 mechanical projects, which is not usual for us. We have a pattern of pretty good half.
In our pro forma basis, we're up in a different economy -- difficult economy. We do have many areas growing well.
And we talked about the backlog growth. The reality is sequesters hurt us a little more than we thought it was going to.
We intimated we thought it was about $0.05 when we gave guidance. It's bigger than that.
It's $0.10 to $0.15, at least. Again, we have frozen decision making on new awards, and we've been a net winner of awards as our government businesses grow nicely over the last 5 or 6 years with new awards.
And the bigger irritant or the bigger difficulty is lack of responsiveness for request for equitable adjustments for work that you've been directed to do. As we look forward, we're going to give guidance on a pro forma basis.
But you can see on the page, on 15, what it would be on a GAAP basis. We're expecting about $6.6 billion of revenue, which has really taken what we did before, adjusting for the withdrawal of the U.K.
instead of just the reshaping of the U.K. and then adding RepconStrickland, our best guess on what that will be for the year.
So we expect $2.15 to $2.40. GAAP basis, looks like $1.80 to $2.05.
The pro forma add backs are around $0.35 to $0.40, and that would be the RepconStrickland deal cost, the U.K. restructuring and the U.K.
operating losses as we exit error withdrawal from the construction market. We're planning our 2014 expectation, so [indiscernible] this is important and you know that.
We expect to operate a $300 million to $350 million business. And we expect to earn 3% to 4% operating margins.
So that could help in your planning. For us to achieve the top end of the range, we need to see some improvement in our mechanical margins.
As we go on the back half of the year, we expect that. We expect to see at least flat performance there and I'll keep giving up ground.
Again, we had a very tough compare first half of last -- versus the first half of last year. ..We do need a strong [indiscernible] refining season.
And I want to caution everybody right now, we had an exceptionally strong Q3 last year. We had a customer that had an issue, coupled with we had some turnarounds moved up and others that were delayed until the third quarter from the first quarter.
You will remember that we didn't exactly hit the cover off of the ball in our field services business in the first quarter of '12. We did very well in the second and third quarter, which is unusual.
We expect the refining season to be more weighted towards late third quarter, fourth quarter this year. We need to see the government at least make us whole on some of the work they asked us to do, not all of it.
All these things are possible, but clearly, not all of them are in our control. And with that, I'll take questions.
And, Tunisia, if you can open up the line, that would be great.
Operator
[Operator Instructions] Your first question, from Rich Wesolowski.
Richard Wesolowski - Sidoti & Company, LLC
$90 million U.K. backlog.
Is that going to 0 or is there facilities in there as well?
Anthony J. Guzzi
No, we -- U.K. backlog is we have facility services contracts, so it won't go to 0.
Richard Wesolowski - Sidoti & Company, LLC
Okay. In the facilities margin, from an outsider's perspective, there was a tale of 2 quarters within the half.
I understand the project mix isn't the same every quarter, but I'm wondering if kind of look through that and comment on the performance of both the USM and the rest of your non-refinery facilities operations?
Anthony J. Guzzi
We've seeing very good improvement in our mechanical service business. We are seeing improvement in our site-based business, and we have a little bit of a headwind year-over-year in our government services business.
Mark A. Pompa
And, Rich, this Mark. Just to refresh everybody's memory.
The USM business, seasonally, is weak in quarters 2 and quarters 3 because the focus really moves to the landscaping genre. And what happens there, obviously, is we incur a lot of cost in quarter 2, which we're billing for throughout the year.
So quarter 2 tends to be penalized on a seasonal basis relative to the other 3 quarters of the year.
Richard Wesolowski - Sidoti & Company, LLC
With RepconStrickland, I imagine the turnaround is going to play even a bigger part in the EFS, most of those type of companies operate on May fiscal year-end. So I'm wondering, which is going to be a strongest quarters here in the facilities, with Repcon in there?
Anthony J. Guzzi
I mean, first and fourth should be really good quarters. And the second and third are good for mechanical services, and the site-based and government really are sort of level through the year.
Third quarter -- and a traditional year is really strong for government as they get to the end of the government fiscal year. But if you look at it, big picture, it should be first and fourth, and second and third, a little weaker.
But again, we'll have profitability throughout the year.
Richard Wesolowski - Sidoti & Company, LLC
Lastly, the construction backlog, you're up 16% from a year ago. It seems at odds with the lackluster industry numbers, your own comments that it's still difficult market, and I'm wondering whether you see this as the leading edge of something longer term?
Anthony J. Guzzi
All we can do is bid the work that's there and win it and win the right jobs. And it's still a big market.
We built some nice capability in the transportation sector. We built some nice capability in industrial sector.
I think we'd all agree here, if we didn't have the capability to do those kind of works, we wouldn't be able to do what we did here backlog lies in the quarter.
Operator
Your next question is from Alex Rygiel of FBR Capital Markets.
Alexander J. Rygiel - FBR Capital Markets & Co., Research Division
Tony, you mentioned while you're talking about backlog being up real nicely, can you sort of comment on the competitive environment and where you think pricing is today versus maybe a year ago or 2 years ago?
Anthony J. Guzzi
I'm going ask Mark to help me with this because we have some underlying data that's decent. Look, it's clearly better than it was 3 years ago.
It's better than it was 2 years ago. I think people are getting more rational, especially on bigger jobs.
And they've been there for a while but it -- and I think everybody realizes, hey, this 5 years stroke we've been on is a little better. There's no big groundswell coming, so you better be careful what you bid because that's what's going to be in your numbers.
There's not going to be anything coming behind it that's going to be able to mask that. Mark, you had some things we did on gross margin when you add back some of these things.
Mark A. Pompa
Yes, I mean, I think, Alex, in my commentary, if you look at our domestic and construction operations, clearly, electrical is easy to see because it's right there, still performing at a very high level. Mechanical but for the 2 projects we discussed, it's generating operating margins of around 5%.
So we're pretty confident in what's in backlog as we go forward, as far as the profitability attributes. And personally, I think, as people have been reluctant to commit capital dollars.
And after a long period of time, those who are making decisions really are evaluating the quality of the people that they're working with. And price is always important as we all know, but certainly quality I think is just ever much as important today as certainly as it it's ever been.
So I think that's helpful from an EMCOR perspective.
Alexander J. Rygiel - FBR Capital Markets & Co., Research Division
And, Tony, it seems like there's a lot more talk about some very large commercial projects, hospitality projects, whether or not it's in New York or Las Vegas, there's a lot of talk. And maybe it's the architects and the planners sort of starting to figure out financing and timing.
Are you seeing that? And when could you anticipate seeing a surge in that activity translate into backlog growth in commercial and hospitality?
Anthony J. Guzzi
We're usually 9 to 12 months behind that, Alex. As you know, where we -- the job has to get designed, it's got to get budgeted, then they got to bid it through the general contractors and the construction managers, and then eventually, it ends up on our desk.
So I'd say, we're probably 9 to 12 months out on that. I will tell you this.
I don't want to say that small project work has grown substantially, but it's stabilized and it's gotten more rational. What happened there for a couple of years, and unfortunately, we had about 4 or 5 jobs we were guilty.
Small contractors or service contractors -- small contractors stepped into work they shouldn't be doing. But more negatively, a larger contractor's came down into the small project work, and they really don't know what they're doing with it down there.
And they pollute the market. What you are seeing is those guys get up because they know what they were doing.
And you're seeing more rational pricing return to parts of the service market. And that's good underlying and that's part of which drove the performance improvement year-over-year in our mechanical services business which was quite substantial.
Alexander J. Rygiel - FBR Capital Markets & Co., Research Division
And lastly, what segment is RSI going to be dropped into?
Anthony J. Guzzi
It will be in EFS.
Operator
Your next question from Adam Thalhimer of BB&T Capital Markets.
Adam R. Thalhimer - BB&T Capital Markets, Research Division
I just want to make sure. So Repcon is not into guidance and is $0.10 still the right number for the back half of the year?
Anthony J. Guzzi
Repcon is in guidance. And what we said when we bought it was $0.10, and that's what would be in our guidance.
Adam R. Thalhimer - BB&T Capital Markets, Research Division
Okay. And then what are your thoughts on the margins in the electrical segment good performance in the first half of the year?
Have you had any kind of project closeouts in there? Or do you think can kind of maintain this number?
Anthony J. Guzzi
It's pure operations right now. There was no significant closeouts.
We're not finishing anything. The good news about us, Adam, is when we have those kind of things, seriously, we talked a lot about this loss today.
You can tell we don't tend to make excuses. We just tell you what the impact was.
We're going to deal with it, we'll deal with it. We're not happy about it.
I'd say a portion of it's our fault, and a big portion of it isn't our fault. In the industrial project, we said we're doing the right thing by the customer.
We could've grounded out and said, well, it was us. We're in this business for the long term.
We jumped in and said this jobs getting finished. On the DOE side, you can say it's a very confused state of affairs and when this thing is designed.
And hopefully, we're coming to the end of that now, and that's usually when the losses come, right, when you're coming to the end of it. We do the same thing on the upside.
If you followed us over the last couple of years, as you have closely, when we closing off the hospitality work and other, we tried to tell you what we thought the outsize impact on our business was from those margins. So you can usually count on us to do that -- always count on us to do that when that happens.
So when you look at the first half, along with the answers to where you're going, you look at the first half in electrical, it's sort running the West Coast office. There's nothing fancy going on here.
We're just executing like crazy. And we've got a bunch of guys just grinding out labor productivity right now in a tough market.
Adam R. Thalhimer - BB&T Capital Markets, Research Division
Okay. And lastly, just what are your thoughts on -- I know you covered this in a previous call, the Repcon in 2014, is it just -- you just take whatever the impact expected to be in the back half of '13 and multiply that by 2?
For '14, is there anything else you that should be happening?
Anthony J. Guzzi
We think it's a little more than multiply by 2, because again, first half has to be a little bit stronger than the second-half. Also we're not getting this until August really effectively.
And so much depends on the customer mix that we'll have. What we like about the transaction and what we like about what we're seeing so far as we delve in, you hear a lot of people talk about refining space.
First of all, you can't watch this sort of turnaround season to turnaround season. The fundamentals are there, good long-term trends.
So much is dependent on what your customer's doing that quarter. The good news is, we've got broader coverage across customers now.
And we're playing at more parts of it. We have at least 2 products now that feed not just the turnarounds we will be executing, they'd feed other people's turnaround.
Is it augmented labor or specialized labor, which is Turnaround Welding Services, or cleaning in shop services and repair services which is [indiscernible] job services? Base tending are a better indication of what's happening broadly in the refining sector.
When you look at those broadly, there's still a lot of maintenance work going on. In each one of us that are Turnaround contractors, then you get to the specifics of Altair or Repcon or OIS, you get into specifics, we're dependent on what customers would want to turnaround.
Something those scopes expand, sometimes those scopes don't expect to, and sometimes those turnarounds got pushed by a month or 2, or sometimes even a little seasonal, you do a mini turnaround. So all those things come into play.
Obviously, when we give guidance in '14, we'll know -- we'll have a pretty good idea of what we expect for the year.
Operator
Your next question from Steven Folse of Stifel.
Steven Folse - Stifel, Nicolaus & Co., Inc., Research Division
First question. I guess I was just double checking that those mechanical -- troubled mechanical projects were completed.
And then if not, is there any expected continued drag into the third quarter?
Anthony J. Guzzi
Let's go how we have to account for it and Mark will take it. Look, if we know the losses there and we estimate the cost to complete and get a sizable loss, it's reflected immediately in the P&L.
Now it may depress margins a little bit going forward, because you would be taking revenue with no profit, but the losses you could argue to stop the minute you account for the losses.
Mark A. Pompa
The only drag that you have in the back half of year is now you're going to have some revenues flow through without any margin because of their loss contracts.
Anthony J. Guzzi
The industrial project should finish up here in the third quarter. The DOE project, we think we've got it captured.
We're over 80% complete, and we have to keep grinding it out.
Steven Folse - Stifel, Nicolaus & Co., Inc., Research Division
And then on EFS, you guys have talked a little bit about the portfolio reshaping going on there or downsizing some of the government side business. Is that segment still a little bit more disproportionately weighted towards the government than some of the other divisions?
I know you guys have said 15 to 18 before but...
Anthony J. Guzzi
We've never talked about downsizing our government portfolio. What we said is, we reshaped our commercial portfolio with a couple of contracts.
If you look at the weighting of the business, as far as the site-based business, we are larger commercially than we are in government.
Operator
Your next question from Nick Coppola of Thompson Research Group.
Nicholas A. Coppola - Thompson Research Group, LLC
So looking at the strong domestic backlog growth, especially construction, are there more opportunities available in the marketplace at this point? I'm kind of wondering if you're viewing this as an inflection point where more work is recurring?
Anthony J. Guzzi
There is a little bit of growth, right? If you look at some of the census data, public stop, private stop.
Reality is we want some work in transportation which is public, but it's long-term projects that needs to be done or we won't be driving here in the Metro New York area 5 years from now. So some of it is a mix of both.
What really you need to see to improve and if you look at our backlog and you adjust for the service agreement we took -- a couple of service agreements we took out in Q4, you are seeing growth in commercial. So when we say more work is becoming available, what people really talk about that is in the commercial market.
And I think it is up a little bit, at least that's what everybody intimating and the data supports that. Industrial is a little different.
You can swing because of plants being built or it can swing because of power plants. There are good private opportunities on the industrial side right now, and really, it's being driven by what's going on in the energy sector here in the U.S.
And we're participants in that, and we're bigger participants than we ever have been. So I think you've got to parse it.
I want to go quit worrying about rising tide and let's all votes because there haven't been much of that in 5 years, and I think it's made us a better of company. And we'd like to have a little bit of variety.
This made us a better company we've gotten very disciplined in how we approach work.
R. Kevin Matz
Nick, it's Kevin. What you need to also look at when you take a look at transport -- transportation and water & wastewater and go back over time, a lot of those projects are a little bit lumpy.
And so you'll see that we've always participated, we work it down, then we win some projects, we work it back. So this is not uncommon for us to see some growth from time to time.
Anthony J. Guzzi
And it's usually very good work for us.
R. Kevin Matz
Right.
Nicholas A. Coppola - Thompson Research Group, LLC
Yes, that's helpful. And then just to catch on about the summer season here, through July, is there any kind of benefit from hot weather?
Anthony J. Guzzi
Let's go to degree cooling days here in April, May and June. They're down.
So there is a -- we've had substantial improvement in mechanical service business in that quarter with no help from the weather. Now was last week a glorious week to be in EMCOR company in the Northeast?
Yes, absolutely. Would we like 3 more weeks of that?
Sure. But the reality is, it's 70 degrees here in Connecticut.
And with 42 degrees in Pittsburgh last night. So hope they gave our guidance a chance to recover this week a little bit.
We're doing some project work. I do think people realize that they were very lucky to have an EMCOR service agreement last week.
As we actually came out and met our customers, we were sold out. Call on work for the most part couldn't happen.
We went and took care of our customers that have committed to us, and I'm sure this week we're getting to the ones that didn't commit to us and realize we're the best option in the market.
Operator
Your next question is from John Rogers of Davidson.
John B. Rogers - D.A. Davidson & Co., Research Division
Just a little bit of follow-up. Tony, the difference in -- I understand the margin difference, but between electrical and mechanical growth, is that -- what is driving that?
Is it just the mix of businesses series or is there something going on with the end market there exposure?
Anthony J. Guzzi
Mark talked about the commercial and Altair finishing up. But really part of it also is we have pretty good industrial performance this year.
We had great industrial performance last year. We have a great industrial backlog.
You know this, John. It's very difficult quarter-to-quarter to look at some of those things you would have to have.
We had such a strong first half last year in mechanical that the compare is really tough.
Mark A. Pompa
And remember, electrical didn't quite have that kind of half last year. It was upside down from what it looks like this year.
John B. Rogers - D.A. Davidson & Co., Research Division
Okay. Any in terms of where you're adding people, hiring people to prepare for this a little bit better backlog, any comments there?
Anthony J. Guzzi
We've always been fortunate to be able to find the skilled labor that we need. We tend to have the skill supervision.
We tend to keep those folks busy. They may have to do things they don't necessarily like to do.
When the economy is tougher, a lot of them will put tools back in their hands. And then they go back to being supervision, now that we have more work.
But we've always been fortunate to be able to source it. I think there's a lot of reasons for that.
One is, to start with, that's the skilled trade person, and they're terrific, they know they're going to get paid out of an EMCOR company every week. That's never a question.
The second thing is, they know they're going to be working in a very safe environment. We're not only there trained to do things right and safely, but their supervision is trained on safety and believes in it wholeheartedly.
They also know they're going to have the best PP&E to execute that task. And so they're not going to be working with shoddy equipment.
They'll be working with the right equipment to get the task done. I think the reputation of our local leadership and our local CEOs and the care that they take for their people really allow us to keep our base workforce intact and really allow us to track the best workforce, when we need to top it off as we grow backlog.
John B. Rogers - D.A. Davidson & Co., Research Division
And lastly, on Repcon, has the cost of this acquisition or the fees involved, have they grown since we talked a couple of weeks ago?
Anthony J. Guzzi
I think we said $6 million to $7 million. I think...
Mark A. Pompa
That's in our first press release that we issued on the 9th -- 17th, I think.
John B. Rogers - D.A. Davidson & Co., Research Division
Okay, but previously, you hadn't talked about the cost you incurred in the 3 quarters.
Anthony J. Guzzi
No, no, we haven't talked about it.
Mark A. Pompa
There was nothing in quarter 1. So isolated the Q2 and, obviously, Q3.
Anthony J. Guzzi
John, as you know, for all you guys on the phone, if the financial sector would get a little more competitive, we would have bankers to help us. And the banks are getting more competitive when we need to borrow money.
We could drop those fees.
John B. Rogers - D.A. Davidson & Co., Research Division
And then lastly terms of additional acquisition opportunities, I mean, if the market's not growing quite as quickly as we had all hoped a year or so, I mean, are you seeing more opportunities out there?
Anthony J. Guzzi
We tend to look at opportunities -- we tend to know the sort of companies and actually the names of the companies would like to buy. A big chunk -- the private market deals we do, what I mean by that is someone who's taken a family business, who's been in their family for 80 years and they're selling it to EMCOR.
That's something that sort of happens regardless of what's going on. It's a long-term, are we going to trust each other to make this work?
Private equity is a different animal. Why did RepconStrickland become for sale now?
I think it's pretty obvious. The outlook for the market's better, they've had a return to reasonable earnings, they've owned it for 6 or 7 years, they're going to sell it.
There's probably a couple more properties like that out there right now. It would have to be, again, the right fit for us.
We got get -- in our sector, we got to get through RepconStrickland first. And would we like to add little more shop capability?
Probably. I mean there's other things we would like to be able to do than we are doing, and it's due [ph] today in the heat exchanger's site.
And they maybe [indiscernible]. They'd be nothing like the size of RepconStrickland.
My guess is, unless something compelling comes up, we're probably back to doing sort of the $30 million to $70 million deals for a while. And if the right one popped up larger, we would.
We tend to be pretty conservative guys and we'd like to keep that balance sheet in great shape, so we've got to go generate some cash out there.
Anthony J. Guzzi
John, I would say that a year ago versus now, there's a little bit more churn now.
Anthony J. Guzzi
It has slowed down in the last couple -- last 3 weeks.
Mark A. Pompa
But there are a little bit more coming across our desk.
Anthony J. Guzzi
We don't even intend to look at it that way. I mean we're not really serial transactors.
We're sort of it make sense for the market. If you look at what we've done over time, we have some nice business units underneath we've been able to build.
We got electrical mechanical construction and service. We'll add there.
We missed on one last year and electrical. Some knucklehead came down and paid way too much for it.
That was too bad because it was a great fit for us. I've no idea what they bought.
And EFS, we've been able to build 4 really nice businesses. And building services, mechanical services and site-based Government Services and then Industrial Services.
So we're pretty judicious on that, and I think we'll stick to it.
Operator
[Operator Instructions] Your next question is from Saagar Parikh of KeyBanc Capital Markets.
Saagar Parikh - KeyBanc Capital Markets Inc., Research Division
So quick question for Mark. Do we know what the backlog contribution is going to be from Repcon once you guys close that?
Mark A. Pompa
We're not anticipating that there's going to be much backlog. We made that acquisition because the majority of the work is pursuant to time and material arrangement which we do not record in backlog.
Saagar Parikh - KeyBanc Capital Markets Inc., Research Division
Okay, great. And impact from the housing market, what kind of impact have you seen on your business?
And have you seen any private residential contractors that might have creeped into your business during the downturn? Are you starting to see those as people leave?
What else is there maybe from the housing impact?
Anthony J. Guzzi
That biggest impact is skilled tradesmen get absorbed, and that would be the lower end of what we do. They get absorbed.
Anything that absorbs technical labor, electricians, plumbers, pipefitters, millwrights, welders is good. More of those guys are getting absorbed because of what's going on in housing and what's going on in every oil and gas business.
Those 2 together should point in certain markets premium and technical labor, which is good for EMCOR.
Saagar Parikh - KeyBanc Capital Markets Inc., Research Division
Okay, and then last question. I know you talked quite a bit about the 2-project issues you had in your mechanical construction segment.
What gives you confidence you have the right people in the segment, the right controls, the right checks and balances that these type portfolio issues won't happen again? Would that be the DOE or the GSA that those issues won't creep up?
Anthony J. Guzzi
Saagar, the way I look at it is we performed in an exceptional way through this entire downturn. We've operated a construction business at really high return on capital for a long time and industry-leading return on sales.
There's no reason for me to believe that's not going to continue. None of the people [indiscernible].
That being said, on these particular instances, there has been changes that are made. We've injected a little more management talent to oversee it, and we will get to resolution.
Our folks know how to do that. But the same guys that brought you 5.5% operating margins in mechanical plus are the same guys that will make sure that this gets corrected.
Operator
At this time, there are no further questions. I will now turn the call over to management for closing remarks.
Anthony J. Guzzi
Well, everybody, thank you very much for your interest in EMCOR. Let's all hope for a really hot August.
Thank you.
Operator
This concludes today's conference. You may now disconnect.