Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are one of the largest electrical and mechanical construction and facilities services firms in the United States. In addition, we provide a number of building services and industrial services. Our services are provided to a broad range of commercial, industrial, utility and institutional customers through approximately 75 operating subsidiaries and joint venture entities. Our offices are located in the United States and the United Kingdom.

Operating Segments

Our reportable segments reflect certain reclassifications of prior year amounts from our United States mechanical construction and facilities services segment to our United States building services segment due to changes in our internal reporting structure.

We have the following reportable segments, which provide services associated with the design, integration, installation, start-up, operation and maintenance of various systems: (a) United States electrical construction and facilities services (involving systems for electrical power transmission and distribution; premises electrical and lighting systems; process instrumentation in the refining, chemical process, food process and mining industries; low-voltage systems, such as fire alarm, security and process control; voice and data communication; roadway and transit lighting; and fiber optic lines); (b) United States mechanical construction and facilities services (involving systems for heating, ventilation, air conditioning, refrigeration and clean-room process ventilation; fire protection; plumbing, process and high-purity piping; controls and filtration; water and wastewater treatment; central plant heating and cooling; cranes and rigging; millwrighting; and steel fabrication, erection and welding); (c) United States building services; (d) United States industrial services; and (e) United Kingdom building services. The “United States building services” and “United Kingdom building services” segments principally consist of those operations which provide a portfolio of services needed to support the operation and maintenance of customers’ facilities, including commercial and government site-based operations and maintenance; facility maintenance and services, including reception, security and catering services; outage services to utilities and industrial plants; military base operations support services; mobile maintenance and services; floor care and janitorial services; landscaping, lot sweeping and snow removal; facilities management; vendor management; call center services; installation and support for building systems; program development, management and maintenance for energy systems; technical consulting and diagnostic services; infrastructure and building projects for federal, state and local governmental agencies and bodies; and small modification and retrofit projects, which services are not generally related to customers’ construction programs. The “United States industrial services” segment principally consists of those operations which provide industrial maintenance and services, including those for refineries and petrochemical plants, including on-site repairs, maintenance and service of heat exchangers, towers, vessels and piping; design, manufacturing, repair and hydro blast cleaning of shell and tube heat exchangers and related equipment; refinery turnaround planning and engineering services; specialty welding services; overhaul and maintenance of critical process units in refineries and petrochemical plants; and specialty technical services for refineries and petrochemical plants.

Impact of Acquisitions

In order to provide a more meaningful period-over-period discussion of our operating results, we may discuss amounts generated or incurred (revenues, gross profit, selling, general and administrative expenses and operating income) from companies acquired. The amounts discussed reflect the acquired companies’ operating results in the current reported period only for the time period these entities were not owned by EMCOR in the comparable prior reported period.

2017 versus 2016

Overview

The following table presents selected financial data for the fiscal years ended December 31, 2017 and 2016 (in thousands, except percentages and per share data):

20172016
Revenues$7,686,999$7,551,524
Revenues increase from prior year1.8%12.4%
Restructuring expenses$1,577$1,438
Impairment loss on goodwill and identifiable intangible assets$57,819$2,428
Operating income$330,554$308,458
Operating income as a percentage of revenues4.3%4.1%
Income from continuing operations$228,050$185,295
Net income attributable to EMCOR Group, Inc.$227,196$181,935
Diluted earnings per common share from continuing operations$3.83$3.02

The results of our operations for 2017 set new company records in terms of revenues, operating income, net income attributable to EMCOR Group, Inc. and diluted earnings per common share from continuing operations, despite the challenges faced by our United States industrial services segment during 2017.

The increase in revenues for 2017 was primarily attributable to incremental revenues of $192.4 million generated by companies acquired in 2017 and 2016, which are reported in our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment and our United States building services segment. Excluding the effect of these acquisitions, revenues for 2017 decreased due to lower revenues from: (a) our United States industrial services segment, due to: (i) a decrease in large project activity from our specialty services offerings within our field services operations, (ii) the negative impact of Hurricane Harvey, which resulted in the deferral of, and may lead to the potential cancellation of, previously scheduled turnaround projects, and (iii) our industrial shop services operations and (b) our United States building services segment, primarily attributable to: (i) the loss of certain contracts not renewed pursuant to rebid within our commercial and government site-based services operations and (ii) a reduction in large project activity within their energy services operations. These decreases in revenues were partially offset by by an increase in revenues from both of our domestic construction segments and our United Kingdom building services segment.

Despite a recent increase in crude oil prices, we continue to experience a decrease in demand for new heat exchangers due to a prolonged curtailment in capital spending from customers within our United States industrial services segment. In addition, adverse market conditions and an increasingly competitive business environment within both our shop services operations and our field services operations have resulted in a decrease in our billing rates and related gross profit margins. Consequently, we have tempered our expectations regarding the strength of a near-term recovery within the United States industrial services segment and recorded a non-cash goodwill impairment charge of $57.5 million during the fourth quarter of 2017.

Operating income and operating margin (operating income as a percentage of revenues) increased within all of our reportable segments, except for our United States industrial services segment. The overall increase in operating income and operating margin was mainly attributable to the results of our domestic construction segments, which were favorably impacted by an increase in gross profit within the majority of the market sectors in which we operate. In addition, our 2016 operating results were negatively impacted by: (a) $27.9 million of aggregate losses incurred on two construction projects reported within our United States mechanical construction and facilities services segment and (b) $19.4 million of losses incurred on a transportation construction project in the Northeastern region of the United States reported within our United States electrical construction and facilities services segment. Companies acquired in 2017 and 2016 contributed incremental operating income of $3.5 million, inclusive of $10.7 million of amortization expense associated with identifiable intangible assets.

We acquired three companies during 2017. One company provides fire protection and alarm services primarily in the Southern region of the United States. The second company provides millwright services for manufacturing companies throughout the United States. Both of their results have been included in our United States mechanical construction and facilities services segment. The third company provides mobile mechanical services within the Western region of the United States, and its results have been included in our United States building services segment.

We completed the acquisition of Ardent Services, L.L.C. and Rabalais Constructors, LLC (collectively, “Ardent”) during 2016. This acquisition has been included in our United States electrical construction and facilities services segment. Ardent provides

electrical and instrumentation services to the energy infrastructure market in North America, and this acquisition further strengthens our position in electrical construction and services and broadens our capabilities across the industrial and energy sectors, especially in the Gulf Coast, Midwest and Western regions of the United States. Additionally during 2016, we acquired another company for an immaterial amount. This company provides mobile mechanical services within the Southeastern region of the United States, and its results have been included in our United States building services segment.

We acquired three companies in 2015, each for an immaterial amount. Two of the companies acquired primarily provide mechanical construction services, and their results of operations have been included in our United States mechanical construction and facilities services segment. The results of operations for the other company acquired have been included in our United States building services segment.

Discussion and Analysis of Results of Operations

Revenues

The following table presents our revenues for each of our operating segments and the approximate percentages that each segment’s revenues were of total revenues for the years ended December 31, 2017 and 2016 (in thousands, except for percentages):

2017% of Total2016% of Total
Revenues from unrelated entities:
United States electrical construction and facilities services$1,829,56724%$1,704,40323%
United States mechanical construction and facilities services2,963,81539%2,643,32135%
United States building services1,753,70323%1,810,22924%
United States industrial services799,16910%1,067,31514%
Total United States operations7,346,25496%7,225,26896%
United Kingdom building services340,7454%326,2564%
Total worldwide operations$7,686,999100%$7,551,524100%

As described in more detail below, revenues for 2017 were $7.7 billion compared to $7.6 billion for 2016. Increases in revenues within both of our domestic construction segments and our United Kingdom building services segment were partially offset by decreases within our United States industrial services segment and our United States building services segment. The increase in revenues for 2017 was primarily attributable to incremental revenues of $192.4 million generated by companies acquired in 2017 and 2016, which are reported in our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment and our United States building services segment.

Revenues of our United States electrical construction and facilities services segment were $1,829.6 million for the year ended December 31, 2017 compared to revenues of $1,704.4 million for the year ended December 31, 2016. The increase in revenues was primarily attributable to an increase in revenues from commercial, institutional and healthcare construction projects. The increase in revenues within the commercial market sector was primarily a result of work performed on numerous telecommunication construction projects. The results for the year ended December 31, 2017 included $50.4 million of incremental revenues generated by the acquisition of Ardent.

Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2017 were $2,963.8 million, a $320.5 million increase compared to revenues of $2,643.3 million for the year ended December 31, 2016. The increase in revenues was primarily attributable to an increase in revenues from healthcare, commercial and hospitality construction projects. The results for the year ended December 31, 2017 included $76.2 million of incremental revenues generated by companies acquired in 2017.

Revenues of our United States building services segment were $1,753.7 million and $1,810.2 million in 2017 and 2016, respectively. The decrease in revenues was primarily attributable to: (a) the loss of certain contracts not renewed pursuant to rebid within our commercial and government site-based services operations, (b) a reduction in large project activity within its energy services operations and (c) a reduction in snow removal activities within our commercial site-based services operations. These decreases were partially offset by an increase in revenues from our mobile mechanical services operations as a result of greater project, service and controls activities. The results for the year ended December 31, 2017 included $65.8 million of incremental revenues generated by companies acquired in 2017 and 2016.

Revenues of our United States industrial services segment for the year ended December 31, 2017 decreased by $268.1 million compared to the year ended December 31, 2016. The decrease in revenues was attributable to decreased large project activity from our specialty services offerings within our field services operations, as well as a continued decrease in demand for new build heat exchangers from our shop services operations. In addition, this segment’s revenues were negatively impacted by Hurricane Harvey, which resulted in the deferral of, and may lead to the potential cancellation of, previously scheduled turnaround projects. Such decrease in turnaround projects also led to reduced repair work within our shop services operations.

Our United Kingdom building services segment revenues were $340.7 million in 2017 compared to $326.3 million in 2016. The increase in revenues was the result of new contract awards within the commercial and institutional market sectors, partially offset by a decrease in project activity with existing customers. This segment’s revenues were negatively impacted by $15.9 million related to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The unfavorable exchange rates for the year ended December 31, 2017 resulted, in part, from the 2016 decision by the United Kingdom to exit the European Union.

Backlog

The following table presents our operating segment backlog from unrelated entities and their respective percentages of total backlog (in thousands, except for percentages):

December 31, 2017% of TotalDecember 31, 2016% of Total
Backlog:
United States electrical construction and facilities services$1,148,32930%$1,221,23731%
United States mechanical construction and facilities services1,683,71844%1,818,53647%
United States building services716,98619%663,34017%
United States industrial services61,8762%50,2791%
Total United States operations3,610,90995%3,753,39296%
United Kingdom building services179,1485%149,5304%
Total worldwide operations$3,790,057100%$3,902,922100%

Our backlog at December 31, 2017 was $3.79 billion compared to $3.90 billion at December 31, 2016. This decrease in backlog was attributable to a decrease in backlog from our United States mechanical construction and facilities services segment and our United States electrical construction and facilities services segment. Backlog increases with awards of new contracts and decreases as we perform work on existing contracts. Backlog is not a term recognized under United States generally accepted accounting principles; however, it is a common measurement used in our industry. We include a project within our backlog at such time as a contract is awarded and agreement on contract terms has been reached. Backlog includes unrecognized revenues to be realized from uncompleted construction contracts plus unrecognized revenues expected to be realized over the remaining term of services contracts. However, we do not include in backlog contracts for which we are paid on a time and material basis and a fixed amount cannot be determined, and if the remaining term of a services contract exceeds 12 months, the unrecognized revenues attributable to such contract included in backlog are limited to only the next 12 months of revenues provided for in the contract award. Our backlog also includes amounts related to services contracts for which a fixed price contract value is not assigned when a reasonable estimate of total revenues can be made from budgeted amounts agreed to with our customers. Our backlog is comprised of: (a) original contract amounts, (b) change orders for which we have received written confirmations from our customers, (c) pending change orders for which we expect to receive confirmations in the ordinary course of business and (d) claim amounts that we have made against customers for which we have determined we have a legal basis under existing contractual arrangements and as to which we consider recovery to be probable. Such claim amounts were immaterial for all periods presented. Our backlog does not include anticipated revenues from unconsolidated joint ventures or variable interest entities nor anticipated revenues from pass-through costs on contracts for which we are acting in the capacity of an agent and which are reported on the net basis. We believe our backlog is firm, although many contracts are subject to cancellation at the election of our customers. Historically, cancellations have not had a material adverse effect on us.

As discussed in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, in May 2014, an accounting pronouncement was issued by the Financial Accounting Standards Board (“FASB”) to clarify existing guidance on revenue recognition. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017, and we will adopt the standard on January 1, 2018. As part of such guidance, a company is required to disclose the amount of revenues to be recognized from remaining unsatisfied performance obligations in existing contracts. Such measure will replace our current non-GAAP backlog disclosure. Although not expected to result in a material difference as it relates to our long-term construction contracts, we believe the new guidance will result in a

significant decrease in backlog as it pertains to our fixed price services contracts. Under our current backlog measurement as discussed above, if the remaining term of a services contract exceeds 12 months, the unrecognized revenues attributable to such contract included in backlog are limited to only the next 12 months of revenues provided for in the contract award. However, under the GAAP measurement, revenues included in backlog for services contracts may be limited by the termination clause within such contracts, many of which are subject to cancellation or suspension on short notice at the discretion of our customers.

Cost of sales and Gross profit

The following table presents cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) for the years ended December 31, 2017 and 2016 (in thousands, except for percentages):

20172016
Cost of sales$6,539,987$6,513,662
Gross profit$1,147,012$1,037,862
Gross profit margin14.9%13.7%

Our gross profit for the year ended December 31, 2017 was $1,147.0 million, a $109.2 million increase compared to gross profit of $1,037.9 million for the year ended December 31, 2016. Our gross profit margin was 14.9% and 13.7% for 2017 and 2016, respectively. Gross profit and gross profit margin were favorably impacted by improved operating performance within all of our reportable segments, except for our United States industrial services segment. Gross profit and gross profit margin within our United States mechanical construction and facilities services segment for the year ended December 31, 2017 were favorably impacted by the recovery of certain contract costs previously disputed on a project that was completed in 2016, resulting in $18.1 million of gross profit and a 0.2% favorable impact on the Company’s gross profit margin. In addition, the Company’s gross profit and gross profit margin for the year ended December 31, 2016 were negatively impacted by $47.3 million of losses incurred on the three construction projects previously referenced, which resulted in a 0.8% negative impact on the Company’s gross profit margin for the prior year.

Selling, general and administrative expenses

The following table presents selling, general and administrative expenses and SG&A margin (selling, general and administrative expenses as a percentage of revenues) for the years ended December 31, 2017 and 2016 (in thousands, except for percentages):

20172016
Selling, general and administrative expenses$757,062$725,538
Selling, general and administrative expenses as a percentage of revenues9.8%9.6%

Our selling, general and administrative expenses for the year ended December 31, 2017 were $757.1 million, a $31.5 million increase compared to selling, general and administrative expenses of $725.5 million for the year ended December 31, 2016. Selling, general and administrative expenses as a percentage of revenues were 9.8% and 9.6% for 2017 and 2016, respectively. The increase in selling, general and administrative expenses for the year ended December 31, 2017 included $24.4 million of incremental expenses directly related to companies acquired in 2017 and 2016, including amortization expense attributable to identifiable intangible assets of $3.9 million. In addition to the impact of acquisitions, selling, general and administrative expenses increased due to: (a) an increase in salaries, primarily within our United States mechanical construction and facilities segment, partially as a result of an increase in headcount due to higher revenues compared to the prior year, (b) an increase in incentive compensation expense due to higher annual operating results than in the same prior year period, which resulted in increased accruals for certain of our incentive compensation plans, and (c) an increase in employee healthcare costs. Our selling, general and administrative expenses for the year ended December 31, 2016 included $3.8 million of transaction costs associated with the acquisition of Ardent. The increase in SG&A margin for the year ended December 31, 2017 was due to: (a) unabsorbed overhead costs within our United States industrial services segment due to the deferral of certain turnaround activity as a result of Hurricane Harvey and (b) an increase in both the provision for doubtful accounts and employee healthcare costs.

Restructuring expenses

Restructuring expenses, primarily relating to severance obligations, were $1.6 million and $1.4 million for 2017 and 2016, respectively. As of December 31, 2017 and 2016, the balance of restructuring related obligations yet to be paid was $0.5 million and $0.2 million, respectively. The majority of obligations outstanding as of December 31, 2016 were paid during 2017. The obligations outstanding as of December 31, 2017 will be paid throughout 2018. No material expenses in connection with restructuring from continuing operations are expected to be incurred during 2018.

Impairment loss on goodwill and identifiable intangible assets

In conjunction with our 2017 annual impairment test on October 1, we recognized a $57.8 million non-cash impairment charge. Of this amount, $57.5 million related to goodwill within our United States industrial services segment and $0.3 million related to a subsidiary trade name within the United States building services segment. The goodwill impairment primarily resulted from both lower forecasted revenues and operating margins from our United States industrial services segment, which has been adversely affected by poor market conditions, predominately within its shop services operations due to: (a) a prolonged curtailment in capital spending from customers, (b) increased foreign competition and (c) economic uncertainty within certain South American markets which has caused us to limit our pursuit of opportunities within such countries. The subsidiary trade name impairment resulted from lower forecasted revenues from a company within our United States building services segment.

In conjunction with our 2016 annual impairment test on October 1, we recognized a $2.4 million non-cash impairment charge related to a subsidiary trade name within the United States mechanical construction and facilities services segment. The 2016 impairment resulted from a decrease in the hypothetical royalty rate and lower forecasted revenues from a company within this segment. No impairment of our goodwill was recognized for the year ended December 31, 2016.

Operating income (loss)

The following table presents by segment our operating income (loss) and each segment’s operating income (loss) as a percentage of such segment’s revenues from unrelated entities for the years ended December 31, 2017 and 2016 (in thousands, except for percentages):

2017% of Segment Revenues2016% of Segment Revenues
Operating income (loss):
United States electrical construction and facilities services$150,0018.2%$101,7616.0%
United States mechanical construction and facilities services212,3207.2%132,6675.0%
United States building services81,5044.6%76,8454.2%
United States industrial services19,0842.4%77,8457.3%
Total United States operations462,9096.3%389,1185.4%
United Kingdom building services14,8494.4%11,9463.7%
Corporate administration(87,808)—(88,740)—
Restructuring expenses(1,577)—(1,438)—
Impairment loss on goodwill and identifiable intangible assets(57,819)—(2,428)—
Total worldwide operations330,5544.3%308,4584.1%
Other corporate items:
Interest expense(12,770)(12,627)
Interest income965663
Income from continuing operations before income taxes$318,749$296,494

As described in more detail below, we had operating income of $330.6 million for 2017 compared to operating income of $308.5 million for 2016. Operating margin was 4.3% and 4.1% for 2017 and 2016, respectively. Operating income for the year ended December 31, 2017 included a $57.8 million non-cash impairment charge, which resulted in a 0.8% negative impact on the Company’s operating margin. Operating income and operating margin for the year ended December 31, 2017 benefited from the recovery of certain contract costs previously disputed on a project completed in 2016 within our United States mechanical construction and facilities services segment, which resulted in a 0.2% favorable impact on the Company’s operating margin.

The Company’s operating income and operating margin for the year ended December 31, 2016 were negatively impacted by $47.3 million of losses incurred on the three construction projects previously referenced, which resulted in a 0.7% negative impact on the Company’s operating margin for the prior year.

Operating income of our United States electrical construction and facilities services segment for the year ended December 31, 2017 was $150.0 million compared to operating income of $101.8 million for the year ended December 31, 2016. The increase in operating income was attributable to an increase in gross profit from: (a) the commercial market sector, primarily as a result of work performed on numerous telecommunication construction projects, (b) the transportation market sector, due to large project activity, and (c) construction projects within the institutional market sector. In addition, the results for the year ended December 31, 2016 included losses of $19.4 million incurred on a construction project in the Northeastern United States. The increase in

operating margin for the year ended December 31, 2017 was attributable to improved operating performance, partially as a result of increased gross profit margin from numerous construction projects within the commercial and transportation market sectors. Operating margin for the year ended December 31, 2016 was negatively impacted by 1.2% as a result of the losses incurred on the construction project previously referenced. From January 1, 2017 to April 15, 2017, Ardent incurred an operating loss of $1.8 million, inclusive of $0.9 million of amortization expense associated with identifiable intangible assets. As previously discussed under “Impact of Acquisitions”, these amounts represent Ardent’s operating results in the current reported period only for the time period Ardent was not owned by EMCOR in the comparable prior reported period.

Our United States mechanical construction and facilities services segment operating income for the year ended December 31, 2017 was $212.3 million, a $79.7 million increase compared to operating income of $132.7 million for the year ended December 31, 2016. The increase in operating income for the year ended December 31, 2017 was attributable to an increase in gross profit from the majority of the market sectors in which we operate. Additionally, this segment’s operating income benefited from the recovery of certain contract costs previously disputed on a project completed in 2016, which resulted in $18.1 million of gross profit. Companies acquired in 2017 contributed incremental operating income of $2.7 million, inclusive of $8.3 million of amortization expense associated with identifiable intangible assets. The increase in operating margin for the year ended December 31, 2017 was attributable to an increase in gross profit margin. The recovery of the previously disputed contract costs discussed above favorably impacted this segment’s operating margin by 0.6% for the year ended December 31, 2017.

Operating income of our United States building services segment was $81.5 million and $76.8 million in 2017 and 2016, respectively. The increase in operating income for the year ended December 31, 2017 was due to increases in operating income from: (a) our mobile mechanical services operations, as a result of increases in gross profit from project, service and control activities, and (b) our energy services operations. The increase in operating income for our energy services operations primarily resulted from improved project execution, as the results for the year ended December 31, 2016 included a loss incurred on a large project. Additionally, companies acquired in 2017 and 2016 within our mobile mechanical services operations, contributed incremental operating income of $2.6 million, inclusive of $1.5 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2017. The increase in operating income for the year ended December 31, 2017 was partially offset by a decrease in gross profit from our commercial site-based services operations partially due to: (a) the loss of certain contracts not renewed pursuant to rebid and (b) a reduction in snow removal activities. The increase in operating margin for the year ended December 31, 2017 was attributable to an increase in gross profit margin.

Operating income of our United States industrial services segment for the year ended December 31, 2017 was $19.1 million, a $58.8 million decrease compared to operating income of $77.8 million for the year ended December 31, 2016. The decrease in operating income for the year ended December 31, 2017 was attributable to a decrease in gross profit from: (a) our specialty services offerings within our field services operations, as a result of reduced large project activity, (b) a decrease in turnaround activity from our field services operations, partially due to Hurricane Harvey, which resulted in the deferral of, and may lead to the potential cancellation of, previously scheduled turnaround projects, and (c) the mix of work in our industrial shop services operations, which included fewer repair projects that generate higher gross profit margins. The decrease in operating margin was attributable to a decrease in gross profit margin and an increase in the ratio of selling, general and administrative expenses to revenues. The increase in SG&A margin for the year ended December 31, 2017 was partially the result of unabsorbed overhead costs as a result of the project deferrals due to Hurricane Harvey and lower specialty services revenues.

Our United Kingdom building services segment’s operating income for the year ended December 31, 2017 was $14.8 million compared to operating income of $11.9 million for the year ended December 31, 2016. Operating income increased primarily due to an increase in gross profit from new contract awards, partially offset by a decrease in gross profit from project activity. This segment’s results included a decrease in operating income of $0.3 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The increase in operating margin for the year ended December 31, 2017 was attributable to an increase in gross profit margin and a decrease in SG&A margin.

Our corporate administration operating loss was $87.8 million for 2017 compared to $88.7 million in 2016. The decrease in corporate administration expenses for the year ended December 31, 2017 was primarily due to a decrease in professional fees, as the prior year included $3.8 million of transaction costs associated with the acquisition of Ardent. The decrease was partially offset by an increase in software licensing costs and incentive compensation expense.

Non-operating items

Interest expense was $12.8 million and $12.6 million for 2017 and 2016, respectively. The increase in interest expense was primarily due to increased average outstanding borrowings in 2017 and a higher United States dollar LIBOR rate. Interest income was $1.0 million and $0.7 million for 2017 and 2016, respectively.

For joint ventures that have been accounted for using the consolidation method of accounting, noncontrolling interests represent the allocation of earnings to our joint venture partners who either have a minority-ownership interest in the joint venture or are not at risk for the majority of losses of the joint venture.

Our 2017 income tax provision from continuing operations was $90.7 million compared to $111.2 million for 2016. The actual income tax rates on income from continuing operations before income taxes, less amounts attributable to noncontrolling interests, for the years ended December 31, 2017 and 2016, were 28.5% and 37.5%, respectively. The decrease in the 2017 income tax provision compared to 2016 was predominantly due to the revaluation of the Company’s net deferred tax liability balances, partially offset by increased income before income taxes.

Discontinued operations

During the third quarter of 2014, we ceased construction operations in the United Kingdom. The results of the construction operations of our United Kingdom segment for all periods are presented in the Consolidated Financial Statements as discontinued operations.

2016 versus 2015

Overview

The following table presents selected financial data for the fiscal years ended December 31, 2016 and 2015 (in thousands, except percentages and per share data):

20162015
Revenues$7,551,524$6,718,726
Revenues increase from prior year12.4%4.6%
Restructuring expenses$1,438$824
Impairment loss on identifiable intangible assets$2,428$—
Operating income$308,458$287,082
Operating income as a percentage of revenues4.1%4.3%
Income from continuing operations$185,295$172,567
Net income attributable to EMCOR Group, Inc.$181,935$172,286
Diluted earnings per common share from continuing operations$3.02$2.72

Our 2016 results included increased revenues from all of our reportable segments, except for our United Kingdom building services segment. The increase in revenues for 2016 was primarily attributable to: (a) our domestic construction segments, due to increased activity within the majority of the market sectors in which we operate, (b) our United States industrial services segment, as a result of increased demand for specialty services offerings within our field services operations, and (c) our United States building services segment, primarily due to higher volume within our mobile mechanical services operations. In addition, companies acquired in 2016 and 2015, which are reported in our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment and our United States building services segment, generated incremental revenues of $250.8 million for the year ended December 31, 2016.

The increase in operating income was attributable to improved operating performance within all of our reportable segments, except for our United States mechanical construction and facilities services segment. Our operating income was favorably impacted by: (a) our United States industrial services segment, as a result of large project activity within our field services operations, (b) our United States electrical construction and facilities services segment, primarily attributable to an increase in gross profit from commercial, transportation and hospitality construction projects, and (c) our United States building services segment, as a result of increased gross profit within our mobile mechanical services operations. In addition, companies acquired in 2016 and 2015 generated incremental operating income of $14.3 million, inclusive of $4.1 million of amortization expense associated with identifiable intangible assets. Our 2016 operating results were negatively impacted by: (a) $27.9 million of aggregate losses incurred on two construction projects reported within our United States mechanical construction and facilities services segment and (b) $19.4 million of losses incurred on a transportation construction project in the Northeastern region of the United States reported within our United States electrical construction and facilities services segment. These three projects were substantially complete at the end of 2016. Corporate administration operating loss increased as a result of: (a) an increase in employment costs, such as incentive compensation and salaries, (b) $3.8 million of transaction costs associated with the acquisition of Ardent in April 2016, (c) an increase in certain non-income related taxes and (d) an increase in software licensing costs and legal costs.

Our operating margin (operating income as a percentage of revenues) was 4.1% and 4.3% for 2016 and 2015, respectively. The decrease in operating margin was attributable to the cumulative impact of the three construction projects previously referenced, which incurred losses of $47.3 million. These three projects resulted in a 0.7% negative impact on the Company’s operating margin for 2016.

Discussion and Analysis of Results of Operations

Revenues

The following table presents our revenues for each of our operating segments and the approximate percentages that each segment’s revenues were of total revenues for the years ended December 31, 2016 and 2015 (in thousands, except for percentages):

2016% of Total2015% of Total
Revenues from unrelated entities:
United States electrical construction and facilities services$1,704,40323%$1,367,14220%
United States mechanical construction and facilities services2,643,32135%2,293,03834%
United States building services1,810,22924%1,758,98426%
United States industrial services1,067,31514%922,08514%
Total United States operations7,225,26896%6,341,24994%
United Kingdom building services326,2564%377,4776%
Total worldwide operations$7,551,524100%$6,718,726100%

As described in more detail below, revenues for 2016 were $7.6 billion compared to $6.7 billion for 2015.

Revenues of our United States electrical construction and facilities services segment were $1,704.4 million for the year ended December 31, 2016 compared to revenues of $1,367.1 million for the year ended December 31, 2015. Excluding the acquisition of Ardent, the increase in revenues was primarily attributable to an increase in revenues from commercial, transportation and hospitality construction projects, partially offset by a decrease in revenues from manufacturing and healthcare construction projects. The results for the year ended December 31, 2016 included $158.5 million of revenues generated by Ardent.

Our United States mechanical construction and facilities services segment revenues for the year ended December 31, 2016 were $2,643.3 million, a $350.3 million increase compared to revenues of $2,293.0 million for the year ended December 31, 2015. The increase in revenues was attributable to an increase in activity within the majority of the market sectors in which we operate. The results for the year ended December 31, 2016 included $45.9 million of incremental revenues generated by companies acquired in 2015.

Revenues of our United States building services segment were $1,810.2 million and $1,759.0 million in 2016 and 2015, respectively. The increase in revenues was primarily attributable to increased revenues from: (a) our mobile mechanical services operations as a result of greater project, service and controls activities and (b) our energy services operations, as a result of an increase in large project activity. The results for the year ended December 31, 2016 included $46.4 million of revenues generated by a company acquired in 2016. These increases were partially offset by a decrease in revenues from our government and commercial site-based services operations as a result of the loss of certain contracts not renewed pursuant to rebid, and in the case of our government site-based services operations, the result of certain scope reductions within their current contract portfolio.

Revenues of our United States industrial services segment for the year ended December 31, 2016 increased by $145.2 million compared to the year ended December 31, 2015. The increase in revenues was primarily due to increased demand for specialty services offerings within our field services operations, including large project activity. The increase in revenues from our field services operations was partially offset by a decrease in revenues from our shop services operations due to lower demand for new heat exchangers as a result of the continued curtailment in capital spending by many large integrated oil companies. In addition, revenues for the first half of 2015 were negatively impacted by a nationwide strike by union employees of certain major oil refineries which led to the cancellation of certain turnaround projects.

Our United Kingdom building services segment revenues were $326.3 million in 2016 compared to $377.5 million in 2015. This segment’s revenues decreased by $41.0 million for the year ended December 31, 2016 related to the effect of unfavorable exchange rates for the British pound versus the United States dollar resulting, in part, from the decision by the United Kingdom to exit the European Union. In addition, the decrease in this segment’s revenues was partially attributable to a decrease in small project activity within the institutional market sector.

Backlog

The following table presents our operating segment backlog from unrelated entities and their respective percentages of total backlog (in thousands, except for percentages):

December 31, 2016% of TotalDecember 31, 2015% of Total
Backlog:
United States electrical construction and facilities services$1,221,23731%$1,145,79130%
United States mechanical construction and facilities services1,818,53647%1,679,21145%
United States building services663,34017%766,48620%
United States industrial services50,2791%54,5781%
Total United States operations3,753,39296%3,646,06697%
United Kingdom building services149,5304%125,0973%
Total worldwide operations$3,902,922100%$3,771,163100%

Our backlog at December 31, 2016 was $3.90 billion compared to $3.77 billion at December 31, 2015. This increase in backlog was primarily attributable to an increase in backlog from all of our reportable segments, except for our United States building services segment and our United States industrial services segment.

Cost of sales and Gross profit

The following table presents cost of sales, gross profit (revenues less cost of sales), and gross profit margin (gross profit as a percentage of revenues) for the years ended December 31, 2016 and 2015 (in thousands, except for percentages):

20162015
Cost of sales$6,513,662$5,774,247
Gross profit$1,037,862$944,479
Gross profit margin13.7%14.1%

Our gross profit for the year ended December 31, 2016 was $1,037.9 million, a $93.4 million increase compared to gross profit of $944.5 million for the year ended December 31, 2015. Our gross profit margin was 13.7% and 14.1% for 2016 and 2015, respectively. The increase in gross profit was attributable to increases in gross profit within all of our reportable segments, except for our United Kingdom building services segment. The decrease in gross profit margin was attributable to the cumulative impact of the three construction projects previously referenced, which incurred losses of $47.3 million. These three projects resulted in a 0.8% negative impact on the Company’s gross profit margin for 2016.

Selling, general and administrative expenses

The following table presents selling, general and administrative expenses and SG&A margin, for the years ended December 31, 2016 and 2015 (in thousands, except for percentages):

20162015
Selling, general and administrative expenses$725,538$656,573
Selling, general and administrative expenses as a percentage of revenues9.6%9.8%

Our selling, general and administrative expenses for the year ended December 31, 2016 were $725.5 million, a $69.0 million increase compared to selling, general and administrative expenses of $656.6 million for the year ended December 31, 2015. Selling, general and administrative expenses as a percentage of revenues were 9.6% and 9.8% for 2016 and 2015, respectively. The increase in selling, general and administrative expenses for the year ended December 31, 2016 included $30.3 million of incremental expenses directly related to companies acquired in 2016 and 2015, including amortization expense attributable to identifiable intangible assets of $3.4 million. Additionally, selling, general and administrative expenses included $3.8 million of transaction costs associated with the acquisition of Ardent in April 2016. Excluding the impact of acquisitions, the increase in selling, general and administrative expenses was primarily due to higher employee related costs such as incentive compensation, salaries and commissions. Increased incentive compensation was principally due to higher annual operating results than in the same prior year period, which resulted in increased accruals for certain of our incentive compensation plans. The increase in salaries was attributable to an increase in headcount due to higher revenues than in the same prior year period, as well as cost of living adjustments and merit pay increases. The increase in selling, general and administrative expenses was also due to increases in the provision for

doubtful accounts, information technology costs and certain non-income related taxes. The decrease in SG&A margin was partially attributable to an increase in revenues without commensurate increases in our overhead cost structure.

Restructuring expenses

Restructuring expenses, primarily relating to severance obligations, were $1.4 million and $0.8 million for 2016 and 2015, respectively. As of December 31, 2016 and 2015, the balance of restructuring related obligations yet to be paid was $0.2 million and $0.1 million, respectively. The majority of obligations outstanding as of December 31, 2016 and December 31, 2015 were paid during 2017 and 2016, respectively.

Impairment loss on goodwill and identifiable intangible assets

In conjunction with our 2016 annual impairment test on October 1, we recognized a $2.4 million non-cash impairment charge related to a subsidiary trade name within the United States mechanical construction and facilities services segment. The 2016 impairment resulted from a decrease in the hypothetical royalty rate and lower forecasted revenues from a company within this segment. No impairment of our identifiable intangible assets was recognized for the year ended December 31, 2015. Additionally, no impairment of our goodwill was recognized for the years ended December 31, 2016 and 2015.

Operating income (loss)

The following table presents by segment our operating income (loss) and each segment’s operating income (loss) as a percentage of such segment’s revenues from unrelated entities for the years ended December 31, 2016 and 2015 (in thousands, except for percentages):

2016% of Segment Revenues2015% of Segment Revenues
Operating income (loss):
United States electrical construction and facilities services$101,7616.0%$82,2256.0%
United States mechanical construction and facilities services132,6675.0%138,4446.0%
United States building services76,8454.2%70,7764.0%
United States industrial services77,8457.3%56,4696.1%
Total United States operations389,1185.4%347,9145.5%
United Kingdom building services11,9463.7%11,6343.1%
Corporate administration(88,740)—(71,642)—
Restructuring expenses(1,438)—(824)—
Impairment loss on identifiable intangible assets(2,428)———
Total worldwide operations308,4584.1%287,0824.3%
Other corporate items:
Interest expense(12,627)(8,932)
Interest income663673
Income from continuing operations before income taxes$296,494$278,823

As described in more detail below, we had operating income of $308.5 million for 2016 compared to operating income of $287.1 million for 2015. Operating margin was 4.1% and 4.3% for 2016 and 2015, respectively. The decrease in operating margin was attributable to the cumulative impact of three construction projects, which incurred losses of $47.3 million. These projects resulted in a 0.7% negative impact on the Company’s operating margin for 2016.

Operating income of our United States electrical construction and facilities services segment for the year ended December 31, 2016 was $101.8 million compared to operating income of $82.2 million for the year ended December 31, 2015. The increase in operating income was partially attributable to an increase in gross profit from commercial, transportation and hospitality construction contracts. The increase in operating income was also partially attributable to the acquisition of Ardent, which contributed operating income of $8.1 million, inclusive of $2.1 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2016. Operating income was negatively impacted by a transportation construction project in the Northeastern region of the United States, which incurred losses of $19.4 million as a result of productivity issues attributable to unfavorable job-site conditions. This project resulted in a 1.2% negative impact on the segment’s operating margin for the year ended December 31, 2016. This project was substantially complete at the end of 2016.

Our United States mechanical construction and facilities services segment operating income for the year ended December 31, 2016 was $132.7 million, a $5.8 million decrease compared to operating income of $138.4 million for the year ended December 31, 2015. This segment’s operating results were negatively impacted by: (a) $18.3 million of losses incurred on a project at a process facility in the Western region of the United States, as a result of a contract dispute with our customer, and (b) $9.6 million of losses incurred throughout 2016 on an institutional construction project in the Southern region of the United States, due to project delays and unfavorable job-site conditions. These projects were substantially complete at the end of 2016. Additionally, the results for 2015 included revenues of $12.1 million recognized as a result of the settlement of a claim on an institutional project located in the Southeastern region of the United States. The decrease in operating income was partially offset by an increase in gross profit from commercial and hospitality construction projects. Additionally, the results for the year ended December 31, 2016 included the receipt of $2.0 million from the former owner of a company we had previously acquired as a result of a settlement of a claim by us under the acquisition agreement. Companies acquired in 2015 generated incremental operating income of $3.4 million, inclusive of $0.6 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2016. The decrease in operating margin was attributable to the cumulative impact of the two projects previously referenced, which resulted in a 1.2% negative impact on this segment’s operating margin for 2016.

Operating income of our United States building services segment was $76.8 million and $70.8 million in 2016 and 2015, respectively. The increase in operating income was primarily attributable to an increase in gross profit from project, service and controls activities within our mobile mechanical services operations. Additionally, a company acquired during the second quarter of 2016, within our mobile mechanical services operations, generated operating income of $2.8 million, inclusive of $1.4 million of amortization expense associated with identifiable intangible assets, for the year ended December 31, 2016. The increase in operating margin for the year ended December 31, 2016 was attributable to an increase in gross profit margin.

Operating income of our United States industrial services segment for the year ended December 31, 2016 increased by $21.4 million compared to operating income for the year ended December 31, 2015. The increase in operating income was primarily attributable to an increase in gross profit from specialty services offerings within our field services operations, including large project activity. In addition, this segment’s results for the first half of 2015 were negatively impacted by a nationwide strike by union employees of certain major oil refineries, which led to the cancellation of certain turnaround projects. The increase in operating income was partially offset by a decrease in gross profit from our shop services operations due to lower demand for new heat exchangers as a result of the continued curtailment in capital spending by many large integrated oil companies. The increase in operating margin was attributable to a decrease in the ratio of selling, general and administrative expenses to revenues.

Our United Kingdom building services segment’s operating income for the year ended December 31, 2016 was $11.9 million compared to operating income of $11.6 million for the year ended December 31, 2015. The increase in operating income was primarily attributable to an increase in gross profit from project activity within the commercial market sector, partially as a result of several contract awards won in 2015, offset in part by a decrease of $1.5 million relating to the effect of unfavorable exchange rates for the British pound versus the United States dollar. The increase in operating margin was attributable to an increase in gross profit margin.

Our corporate administration operating loss was $88.7 million for 2016 compared to $71.6 million in 2015. The increase in expenses for the year ended December 31, 2016 was primarily due to: (a) an increase in employment costs, such as incentive compensation, primarily due to higher annual operating results in 2016 compared to the same prior year period, (b) an increase in certain non-income related taxes, (c) an increase in software licensing costs and (d) an increase in legal costs. Additionally, operating results for the year ended December 31, 2016 included $3.8 million of transaction costs associated with the acquisition of Ardent in April 2016.

Non-operating items

Interest expense was $12.6 million and $8.9 million for 2016 and 2015, respectively. The increase in interest expense was primarily due to increased outstanding borrowings to fund acquisitions. Interest income was $0.7 million for both 2016 and 2015.

For joint ventures that have been accounted for using the consolidation method of accounting, noncontrolling interests represent the allocation of earnings to our joint venture partners who either have a minority-ownership interest in the joint venture or are not at risk for the majority of losses of the joint venture.

Our 2016 income tax provision from continuing operations was $111.2 million compared to $106.3 million for 2015. The actual income tax rates on income from continuing operations before income taxes, less amounts attributable to noncontrolling interests, for the years ended December 31, 2016 and 2015, were 37.5% and 38.1%, respectively. The increase in the 2016 income tax provision compared to 2015 was predominantly due to the effect of increased income before income taxes and certain increases in the state tax provision attributable to the mix of earnings.

Liquidity and Capital Resources

The following table presents net cash provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2017, 2016 and 2015 (in thousands):

201720162015
Net cash provided by operating activities$366,134$264,561$266,666
Net cash used in investing activities$(138,093)$(270,671)$(59,808)
Net cash used in financing activities$(228,470)$(9,429)$(149,473)
Effect of exchange rate changes on cash and cash equivalents$3,242$(6,675)$(2,610)

Our consolidated cash balance increased by approximately $2.8 million from $464.6 million at December 31, 2016 to $467.4 million at December 31, 2017. Net cash provided by operating activities for 2017 was $366.1 million compared to $264.6 million of net cash provided by operating activities for 2016. The increase in cash provided by operating activities was primarily due to a $45.0 million increase in net income and improved cash flows from accounts payable. Net cash used in investing activities was $138.1 million for 2017 compared to net cash used in investing activities of $270.7 million for 2016. The decrease in net cash used in investing activities was primarily due to a reduction in payments for acquisitions of businesses. Net cash flows from financing activities for 2017 decreased by approximately $219.0 million compared to 2016 primarily as a result of net borrowings made under our credit agreements in 2016. Cash flows from discontinued operations were immaterial and are not expected to significantly affect future liquidity.

Our consolidated cash balance decreased by approximately $22.2 million from $486.8 million at December 31, 2015 to $464.6 million at December 31, 2016. Net cash provided by operating activities for 2016 was $264.6 million compared to $266.7 million of net cash provided by operating activities for 2015. The decrease in cash provided by operating activities was primarily due to a reduction in cash flows from changes in inventory balances, partially offset by improved cash flows from net over-billings related to the timing of customer billings and payments. Net cash used in investing activities was $270.7 million for 2016 compared to net cash used in investing activities of $59.8 million for 2015. The increase in cash used in investing activities was primarily due to the increase in payments to acquire businesses and property, plant and equipment. Net cash used in financing activities for 2016 decreased by approximately $140.0 million compared to 2015. The decrease in net cash used in financing activities was primarily due to net borrowings of $125.0 million under our revolving credit facility, a decrease in funds used for the repurchase of common stock and a decrease in distributions to noncontrolling interests, partially offset by a decrease in proceeds from the exercise of stock options.

The following is a summary of material contractual obligations and other commercial commitments (in millions):

Payments Due by Period
Contractual ObligationsTotalLess than 1 year1-3 years3-5 yearsAfter 5 years
Revolving credit facility (including interest at 2.57%) (1)$27.3$0.6$1.3$25.4$—
Term Loan (including interest at 2.69%) (1)310.322.944.4243.0—
Capital lease obligations4.71.52.80.4—
Operating leases303.173.4115.865.448.5
Open purchase obligations (2)1,063.6971.591.30.8—
Other long-term obligations, including current portion (3)375.266.2299.19.9—
Liabilities related to uncertain income tax positions (4)0.9———0.9
Total Contractual Obligations$2,085.1$1,136.1$554.7$344.9$49.4
Amount of Commitment Expirations by Period
Other Commercial CommitmentsTotal Amounts CommittedLess than 1 year1-3 years3-5 yearsAfter 5 years
Letters of credit$110.6$110.6$—$—$—
(1)On August 3, 2016, we entered into a $900.0 million revolving credit facility (the “2016 Revolving Credit Facility”) and a $400.0 million term loan (the “2016 Term Loan”) (collectively referred to as the “2016 Credit Agreement”). The proceeds of the 2016 Term Loan were used to repay amounts drawn under our prior credit agreement. As of December 31, 2017, the amount outstanding under the 2016 Term Loan was $284.8 million. As of December 31, 2017, there were borrowings outstanding of $25.0 million under the 2016 Revolving Credit Facility.
(2)Represents open purchase orders for material and subcontracting costs related to construction and service contracts. These purchase orders are not reflected in the Consolidated Balance Sheets and should not impact future cash flows, as amounts should be recovered through customer billings.
(3)Represents primarily insurance related liabilities, and liabilities for deferred income taxes, incentive compensation and deferred compensation, classified as other long-term liabilities in the Consolidated Balance Sheets. Cash payments for insurance and deferred compensation related liabilities may be payable beyond three years, but it is not practical to estimate these payments; therefore, these liabilities are reflected in the 1-3 years payment period. We provide funding to our post retirement plans based on at least the minimum funding required by applicable regulations. In determining the minimum required funding, we utilize current actuarial assumptions and exchange rates to forecast estimates of amounts that may be payable for up to five years in the future. In our judgment, minimum funding estimates beyond a five year time horizon cannot be reliably estimated, and therefore, have not been included in the table.
(4)Includes $0.1 million of accrued interest.

Until August 3, 2016, we had a credit agreement dated as of November 25, 2013 (as amended, the “2013 Credit Agreement”), which provided for a revolving credit facility of $750.0 million (the “2013 Revolving Credit Facility”) and a term loan of $350.0 million (the “2013 Term Loan”). On August 3, 2016, we amended and restated the 2013 Credit Agreement to provide for a $900.0 million revolving credit facility (the “2016 Revolving Credit Facility”) and a $400.0 million term loan (the “2016 Term Loan”) (collectively referred to as the “2016 Credit Agreement”) expiring August 3, 2021. The proceeds of the 2016 Term Loan were used to repay amounts drawn under the 2013 Term Loan, as well as a portion of the outstanding balance under the 2013 Revolving Credit Facility. We may increase the 2016 Revolving Credit Facility to $1.3 billion if additional lenders are identified and/or existing lenders are willing to increase their current commitments. We may allocate up to $300.0 million of available capacity under the 2016 Revolving Credit Facility to letters of credit for our account or for the account of any of our subsidiaries. Obligations under the 2016 Credit Agreement are guaranteed by most of our direct and indirect subsidiaries and are secured by substantially all of our assets. The 2016 Credit Agreement contains various covenants providing for, among other things, maintenance of certain financial ratios and certain limitations on payment of dividends, common stock repurchases, investments, acquisitions, indebtedness and capital expenditures. We were in compliance with all such covenants as of December 31, 2017 and December 31, 2016. A commitment fee is payable on the average daily unused amount of the 2016 Revolving Credit Facility, which ranges from 0.15% to 0.30%, based on certain financial tests. The fee was 0.15% of the unused amount as of December 31, 2017. Borrowings under the 2016 Credit Agreement bear interest at (1) a base rate plus a margin of 0.00% to 0.75%, based on certain financial tests, or (2) United States dollar LIBOR (1.57% and 1.69% at December 31, 2017 for our 2016 Revolving Credit Facility and our 2016 Term Loan, respectively) plus 1.00% to 1.75%, based on certain financial tests. The base rate is determined by the greater of (a) the prime commercial lending rate announced by Bank of Montreal from time to time (4.50% at December 31, 2017), (b) the federal funds effective rate, plus ½ of 1.00%, (c) the daily one month LIBOR rate, plus 1.00%, or (d) 0.00%. The interest rates in effect at December 31, 2017 were 2.57% and 2.69% for our 2016 Revolving Credit Facility and our 2016 Term Loan, respectively. Fees for letters of credit issued under the 2016 Revolving Credit Facility range from 1.00% to 1.75% of the respective face amounts of outstanding letters of credit and are computed based on certain financial tests. During 2016, we capitalized an additional $3.0 million of debt issuance costs associated with the 2016 Credit Agreement. Debt issuance costs are amortized over the life of the agreement and are included as part of interest expense. The 2016 Term Loan previously required us to make principal payments of $5.0 million on the last day of March, June, September and December of each year, which commenced with the calendar quarter ended December 31, 2016. On December 30, 2016, we made a payment of $100.0 million, of which $5.0 million represented our required quarterly payment and $95.0 million represented a prepayment of outstanding principal. Such prepayment was applied against the remaining mandatory quarterly payments on a ratable basis. As a result, commencing with the calendar quarter ending March 31, 2017, our required quarterly payment has been reduced to $3.8 million. All unpaid principal and interest is due on August 3, 2021. As of December 31, 2017 and December 31, 2016, the balance of the 2016 Term Loan was $284.8 million and $315.0 million, respectively. As of December 31, 2017 and December 31, 2016, we had approximately $110.1 million and $91.9

million of letters of credit outstanding, respectively. There were $25.0 million and $125.0 million in borrowings outstanding under the 2016 Revolving Credit Facility as of December 31, 2017 and December 31, 2016, respectively.

The terms of our construction contracts frequently require that we obtain from surety companies (“Surety Companies”) and provide to our customers payment and performance bonds (“Surety Bonds”) as a condition to the award of such contracts. The Surety Bonds secure our payment and performance obligations under such contracts, and we have agreed to indemnify the Surety Companies for amounts, if any, paid by them in respect of Surety Bonds issued on our behalf. In addition, at the request of labor unions representing certain of our employees, Surety Bonds are sometimes provided to secure obligations for wages and benefits payable to or for such employees. Public sector contracts require Surety Bonds more frequently than private sector contracts, and accordingly, our bonding requirements typically increase as the amount of public sector work increases. As of December 31, 2017, based on our percentage-of-completion of projects covered by Surety Bonds, our aggregate estimated exposure, assuming defaults on all our then existing contractual obligations, was approximately $927.3 million, which represents approximately 24% of our total backlog. The Surety Bonds are issued by Surety Companies in return for premiums, which vary depending on the size and type of bond.

From time to time, we discuss with our current and other Surety Bond providers the amounts of Surety Bonds that may be available to us based on our financial strength and the absence of any default by us on any Surety Bond issued on our behalf and believe those amounts are currently adequate for our needs. However, if we experience changes in our bonding relationships or if there are adverse changes in the surety industry, we may (i) seek to satisfy certain customer requests for Surety Bonds by posting other forms of collateral in lieu of Surety Bonds, such as letters of credit, parent company guarantees or cash, in order to convince customers to forego the requirement for Surety Bonds, (ii) increase our activities in our business segments that rarely require Surety Bonds, such as our building and industrial services segments, and/or (iii) refrain from bidding for certain projects that require Surety Bonds. There can be no assurance that we would be able to effectuate alternatives to providing Surety Bonds to our customers or to obtain, on favorable terms, sufficient additional work that does not require Surety Bonds. Accordingly, if we were to experience a reduction in the availability of Surety Bonds, we could experience a material adverse effect on our financial position, results of operations and/or cash flows.

In the ordinary course of business, we, at times, guarantee obligations of our subsidiaries under certain contracts. Generally, we are liable under such an arrangement only if our subsidiary fails to perform its obligations under the contract. Historically, we have not incurred any substantial liabilities as a consequence of these guarantees.

We do not have any other material financial guarantees or off-balance sheet arrangements other than those disclosed herein.

We are a party to lawsuits and other proceedings in which other parties seek to recover from us amounts ranging from a few thousand dollars to over $10.0 million. We do not believe that any such matters will have a material adverse effect on our financial position, results of operations or liquidity.

On September 26, 2011, our Board of Directors authorized us to repurchase up to $100.0 million of our outstanding common stock. On December 5, 2013, October 23, 2014, October 28, 2015 and October 25, 2017, our Board of Directors authorized us to repurchase up to an additional $100.0 million, $250.0 million, $200.0 million and $100.0 million of our outstanding common stock, respectively. During 2017, we repurchased approximately 1.4 million shares of our common stock for approximately $90.8 million. Since the inception of the repurchase programs through December 31, 2017, we have repurchased approximately 12.8 million shares of our common stock for approximately $575.2 million. As of December 31, 2017, there remained authorization for us to repurchase approximately $174.8 million of our shares. The repurchase programs have no expiration date and do not obligate the Company to acquire any particular amount of common stock and may be suspended, recommenced or discontinued at any time or from time to time without prior notice. We may repurchase our shares from time to time to the extent permitted by securities laws and other legal requirements, including provisions in our credit agreement placing limitations on such repurchases. The repurchase programs have been and will be funded from our operations.

We have paid quarterly dividends since October 25, 2011. We currently pay a regular quarterly dividend of $0.08 per share. Our 2016 Credit Agreement places limitations on the payment of dividends on our common stock. However, we do not believe that the terms of such agreement currently materially limit our ability to pay a quarterly dividend of $0.08 per share for the foreseeable future. The payment of dividends has been and will be funded from our operations.

Our primary source of liquidity has been, and is expected to continue to be, cash generated by operating activities. We also maintain our 2016 Revolving Credit Facility that may be utilized, among other things, to meet short-term liquidity needs in the event cash generated by operating activities is insufficient or to enable us to seize opportunities to participate in joint ventures or to make acquisitions that may require access to cash on short notice or for any other reason. Negative macroeconomic trends may have an adverse effect on liquidity. During economic downturns, there have been typically fewer small discretionary projects from the private sector, and our competitors have aggressively bid larger long-term infrastructure and public sector contracts. Short-term liquidity is also impacted by the type and length of construction contracts in place and large turnaround activities in our

United States industrial services segment that are billed in arrears pursuant to contractual terms that are standard within the industry. Performance of long duration contracts typically requires greater amounts of working capital. While we strive to maintain a net over-billed position with our customers, there can be no assurance that a net over-billed position can be maintained. Our net over-billings, defined as the balance sheet accounts “Billings in excess of costs and estimated earnings on uncompleted contracts” less “Cost and estimated earnings in excess of billings on uncompleted contracts”, were $401.5 million and $358.5 million as of December 31, 2017 and 2016, respectively.

Long-term liquidity requirements can be expected to be met initially through cash generated from operating activities and our 2016 Revolving Credit Facility. Based upon our current credit ratings and financial position, we can reasonably expect to be able to incur long-term debt to fund acquisitions. Over the long term, our primary revenue risk factor continues to be the level of demand for non-residential construction services and for building and industrial services, which is influenced by macroeconomic trends including interest rates and governmental economic policy. In addition, our ability to perform work is critical to meeting long-term liquidity requirements.

We believe that our current cash balances and our borrowing capacity available under our 2016 Revolving Credit Facility or other forms of financing available to us through borrowings, combined with cash expected to be generated from operations, will be sufficient to provide our short-term and foreseeable long-term liquidity and meet our expected capital expenditure requirements.

Certain Insurance Matters

As of December 31, 2017 and 2016, we utilized approximately $109.7 million and $91.5 million, respectively, of letters of credit obtained under our 2016 Revolving Credit Facility as collateral for insurance obligations.

New Accounting Pronouncements

We review new accounting standards to determine the expected impact, if any, that the adoption of such standards will have on our financial position and/or results of operations. See Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations or liquidity.

Application of Critical Accounting Policies

Our consolidated financial statements are based on the application of significant accounting policies, which require management to make significant estimates and assumptions. Our significant accounting policies are described in Note 2 - Summary of Significant Accounting Policies of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Form 10-K. We believe that some of the more critical judgment areas in the application of accounting policies that affect our financial condition and results of operations are the impact of changes in the estimates and judgments pertaining to: (a) revenue recognition from (i) long-term construction contracts for which the percentage-of-completion method of accounting is used and (ii) services contracts; (b) collectibility or valuation of accounts receivable; (c) insurance liabilities; (d) income taxes; and (e) goodwill and identifiable intangible assets.

Revenue Recognition from Long-term Construction Contracts and Services Contracts

We believe our most critical accounting policy is revenue recognition from long-term construction contracts for which we use the percentage-of-completion method of accounting. Percentage-of-completion accounting is the prescribed method of accounting for long-term contracts in accordance with Accounting Standards Codification (“ASC”) Topic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts”, and, accordingly, is the method used for revenue recognition within our industry. Percentage-of-completion is measured principally by the percentage of costs incurred to date for each contract to the estimated total costs for such contract at completion. Certain of our electrical contracting business units measure percentage-of-completion by the percentage of labor costs incurred to date for each contract to the estimated total labor costs for such contract. Pre-contract costs from our construction projects are generally expensed as incurred. Application of percentage-of-completion accounting results in the recognition of costs and estimated earnings in excess of billings on uncompleted contracts in the Consolidated Balance Sheets. Costs and estimated earnings in excess of billings on uncompleted contracts reflected in the Consolidated Balance Sheets arise when revenues have been recognized but the amounts cannot be billed under the terms of contracts. Such amounts are recoverable from customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract.

Costs and estimated earnings in excess of billings on uncompleted contracts also include amounts we seek or will seek to collect from customers or others for errors or changes in contract specifications or design, contract change orders in dispute or unapproved as to both scope and price or other customer-related causes of unanticipated additional contract costs (claims and unapproved

change orders). Such amounts are recorded at estimated net realizable value and take into account factors that may affect our ability to bill and ultimately collect unbilled revenues. The profit associated with claim amounts is not recognized until the claim has been settled and payment has been received. During 2017, we recognized $18.1 million of gross profit associated with the recovery of certain contract costs previously disputed on a project completed in the prior year. There were no other significant settlements or payments of claims in 2017 and 2016. As of December 31, 2017 and 2016, costs and estimated earnings in excess of billings on uncompleted contracts included unbilled revenues for unapproved change orders of approximately $17.4 million and $21.6 million, respectively, and claims of approximately $0.0 million and $6.0 million, respectively. As of December 31, 2017 and 2016, there were no claims amounts included within accounts receivable. There were contractually billed amounts and retention related to contracts with unapproved change orders and claims of approximately $57.6 million and $80.5 million as of December 31, 2017 and 2016, respectively. For contracts in claim status, contractually billed amounts will generally not be paid by the customer to us until final resolution of related claims. Due to uncertainties inherent in estimates employed in applying percentage-of-completion accounting, estimates may be revised as project work progresses. Application of percentage-of-completion accounting requires that the impact of revised estimates be reported prospectively in the consolidated financial statements. In addition to revenue recognition for long-term construction contracts, we recognize revenues from the performance of services for maintenance, repair and retrofit work consistent with the performance of the services, which are generally on a pro-rata basis over the life of the contractual arrangement. Expenses related to all services arrangements are recognized as incurred. Revenues related to the engineering, manufacturing and repairing of shell and tube heat exchangers are recognized when the product is shipped and all other revenue recognition criteria have been met. Costs related to this work are included in inventory until the product is shipped. Provisions for the entirety of estimated losses on uncompleted contracts are made in the period in which such losses are determined. During 2016, we incurred $19.4 million of losses on a transportation project within our United States electrical construction and facilities services segment as a result of productivity issues attributable to unfavorable job-site conditions. In addition, within the United States mechanical construction and facilities services segment, we incurred $18.3 million of losses on a project at a process facility as a result of a contract dispute with our customer and $9.6 million of losses on an institutional project due to project delays and unfavorable job-site conditions. There were no other significant losses recognized in 2017 and 2016.

Accounts Receivable

We are required to estimate the collectibility of accounts receivable. A considerable amount of judgment is required in assessing the likelihood of realization of receivables. Relevant assessment factors include the creditworthiness of the customer, our prior collection history with the customer and related aging of past due balances. The provision for doubtful accounts during 2017, 2016 and 2015 amounted to approximately $7.3 million, $6.2 million and $2.9 million, respectively. At December 31, 2017 and 2016, our accounts receivable of $1,607.9 million and $1,495.4 million, respectively, included allowances for doubtful accounts of $17.2 million and $12.3 million, respectively. The increase in our allowance for doubtful accounts was primarily due to an increase in the provision for doubtful accounts, partially offset by the write-off of previously reserved accounts receivable. Specific accounts receivable are evaluated when we believe a customer may not be able to meet its financial obligations due to deterioration of its financial condition or its credit ratings. The allowance for doubtful accounts requirements are based on the best facts available and are re-evaluated and adjusted on a regular basis as additional information is received.

Insurance Liabilities

We have loss payment deductibles for certain workers’ compensation, automobile liability, general liability and property claims, have self-insured retentions for certain other casualty claims and are self-insured for employee-related healthcare claims. In addition, we maintain a wholly-owned captive insurance subsidiary to manage certain of our insurance liabilities. Losses are recorded based upon estimates of our liability for claims incurred and for claims incurred but not reported. The liabilities are derived from known facts, historical trends and industry averages utilizing the assistance of an actuary to determine the best estimate for the majority of these obligations. We believe the liabilities recognized on our balance sheets for these obligations are adequate. However, such obligations are difficult to assess and estimate due to numerous factors, including severity of injury, determination of liability in proportion to other parties, timely reporting of occurrences and effectiveness of safety and risk management programs. Therefore, if our actual experience differs from the assumptions and estimates used for recording the liabilities, adjustments may be required and will be recorded in the period that the experience becomes known. Our estimated net insurance liabilities for workers’ compensation, automobile liability, general liability and property claims increased by $0.4 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. If our estimated insurance liabilities for workers’ compensation, automobile liability, general liability and property claims were to increase by 10%, it would have resulted in $15.7 million of additional expense for the year ended December 31, 2017.

Income Taxes

We had net deferred income tax liabilities at December 31, 2017 and 2016 of $64.7 million and $117.4 million, respectively, primarily resulting from differences between the carrying value and income tax basis of certain identifiable intangible assets and depreciable fixed assets, which will impact our taxable income in future periods. Included within these net deferred income tax

liabilities are $105.6 million and $139.4 million of deferred income tax assets as of December 31, 2017 and 2016, respectively. A valuation allowance is required when it is more likely than not that all or a portion of a deferred income tax asset will not be realized. As of December 31, 2017 and 2016, the total valuation allowance on deferred income tax assets, related to state net operating loss carryforwards, was approximately $3.8 million and $3.5 million, respectively. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based on our taxable income, which has generally exceeded the amount of our net deferred tax asset balance and projections of future taxable income, we have determined that it is more likely than not that the net deferred income tax assets will be realized.

Goodwill and Identifiable Intangible Assets

As of December 31, 2017, we had $964.9 million and $495.0 million, respectively, of goodwill and net identifiable intangible assets (primarily consisting of our contract backlog, developed technology/vendor network, customer relationships, non-competition agreements and trade names) arising out of the acquisition of companies. As of December 31, 2016, goodwill and net identifiable intangible assets were $979.6 million and $487.4 million, respectively. As of December 31, 2017, approximately 33.9% of our goodwill related to our United States industrial services segment, approximately 26.6% of our goodwill related to our United States mechanical construction and facilities services segment, approximately 26.5% of our goodwill related to our United States building services segment and approximately 13.0% of our goodwill related to our United States electrical construction and facilities services segment. The changes to goodwill since December 31, 2016 were related to a non-cash impairment charge within our United States industrial services segment, the acquisition of three companies in 2017 and a purchase price adjustment related to the Ardent acquisition. The determination of related estimated useful lives for identifiable intangible assets and whether those assets are impaired involves significant judgments based upon short and long-term projections of future performance. These forecasts reflect assumptions regarding the ability to successfully integrate acquired companies, as well as macroeconomic conditions. ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”) requires that goodwill and other identifiable intangible assets with indefinite useful lives not be amortized, but instead tested at least annually for impairment (which we test each October 1, absent any impairment indicators), and be written down if impaired. ASC 350 requires that goodwill be allocated to its respective reporting unit and that identifiable intangible assets with finite lives be amortized over their useful lives.

We test for impairment of our goodwill at the reporting unit level. Our reporting units are consistent with the reportable segments identified in Note 17, “Segment Information”, of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. In assessing whether our goodwill is impaired, we compare the fair value of the reporting unit to the carrying amount, including goodwill. If the fair value exceeds the carrying amount, no impairment loss is recognized. However, if the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired and an impairment loss in the amount of the excess is recognized and charged to operations. The fair value of each of our reporting units is generally determined using discounted estimated future cash flows; however, in certain circumstances, consideration is given to a market approach whereby fair value is measured based on a multiple of earnings.

As of the date of our latest impairment test (October 1, 2017), the carrying values of our United States building services segment, our United States mechanical construction and facilities services segment and our United States electrical construction and facilities services segment were approximately $471.8 million, $313.9 million and $214.1 million, respectively. The fair values of our United States building services segment, our United States mechanical construction and facilities services segment and our United States electrical construction and facilities services segment exceeded their carrying values by approximately $408.9 million, $1,013.3 million and $673.2 million, respectively.

The fair value of our United States industrial services segment fell short of its carrying value of approximately $666.7 million by approximately $57.5 million, resulting in the recognition of a non-cash impairment charge for the year ended December 31, 2017. Despite a recent increase in crude oil prices, we continue to experience a decrease in demand for new heat exchangers due to a prolonged curtailment in capital spending from customers within this segment. In addition, adverse market conditions throughout this segment, including increased foreign competition within our shop services operations, have resulted in a decrease in our billing rates and related gross profit margins. Finally, economic uncertainty within certain South American markets has caused us to limit our pursuit of opportunities within such countries for our shop services operations. Consequently, we have tempered our expectations regarding the strength of a near-term recovery. For the years ended December 31, 2016 and 2015, no impairment of our goodwill was recognized.

The weighted average cost of capital used in our annual testing for impairment as of October 1, 2017 was 10.6%, 10.0% and 11.0% for our domestic construction segments, our United States building services segment and our United States industrial services segment, respectively. The perpetual growth rate used for our annual testing was 2.7% for all of our domestic segments. Unfavorable changes in these key assumptions may affect future testing results. For example, keeping all other assumptions constant, a 50 basis point increase in the weighted average costs of capital would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United

States building services segment and our United States industrial services segment to decrease by approximately $51.1 million, $74.9 million, $53.3 million, and $20.0 million, respectively. In addition, keeping all other assumptions constant, a 50 basis point reduction in the perpetual growth rate would cause the estimated fair values of our United States electrical construction and facilities services segment, our United States mechanical construction and facilities services segment, our United States building services segment and our United States industrial services segment to decrease by approximately $25.1 million, $41.0 million, $28.1 million, and $10.0 million, respectively. Although not significant for any of our other domestic segments, such decreases within our United States industrial services segment would have resulted in an increased impairment charge.

We also test for the impairment of trade names that are not subject to amortization by calculating the fair value of such trade names using the “relief from royalty payments” methodology. This approach involves two steps: (a) estimating reasonable royalty rates for each trade name and (b) applying these royalty rates to a net revenue stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of each trade name. If the carrying amount of the trade name is greater than the implied fair value of the trade name, an impairment in the amount of the excess is recognized and charged to operations. The annual impairment review of our trade names for the years ended December 31, 2017 and 2016 resulted in $0.3 million and $2.4 million, respectively, of non-cash impairment charges as a result of a change in the fair value of subsidiary trade names associated with certain prior acquisitions reported within our United States building services segment and our United States mechanical construction and facilities services segment, respectively. For the year ended December 31, 2015, no impairment of our trade names was recognized.

In addition, we review for the impairment of other identifiable intangible assets that are being amortized whenever facts and circumstances indicate that their carrying values may not be fully recoverable. This test compares their carrying values to the undiscounted pre-tax cash flows expected to result from the use of the assets. If the assets are impaired, the assets are written down to their fair values, generally determined based on their future discounted cash flows. For the years ended December 31, 2017, 2016 and 2015, no impairment of our other identifiable intangible assets was recognized.

As previously referenced, we have certain businesses, particularly within our United States industrial services segment, whose results are highly impacted by the demand for some of our offerings within the industrial and oil and gas markets. Future performance of this segment, along with a continued evaluation of the conditions of its end user markets, will be important to ongoing impairment assessments. Should this segment’s actual results suffer a further decline or expected future results be revised downward, the risk of future goodwill impairment or impairment of other identifiable intangible assets would increase.

Our development of the present value of future cash flow projections used in impairment testing is based upon assumptions and estimates by management from a review of our operating results, business plans, anticipated growth rates and margins, and weighted average cost of capital, among others. Those assumptions and estimates can change in future periods, and other factors used in assessing fair value are outside the control of management, such as interest rates. There can be no assurances that estimates and assumptions made for purposes of our goodwill and identifiable intangible asset impairment testing will prove to be accurate predictions of the future. If our assumptions regarding future business performance or anticipated growth rates and/or margins are not achieved, or there is a rise in interest rates, we may be required to record goodwill and/or identifiable intangible asset impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such a charge would be material.

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