Comfort Systems USA Inc (FIX) 2002 Q4 法說會逐字稿

Good morning and welcome to the 2002 earnings conference call. All participants will be able to listen only until the question and answer session of this call. This conference is being recorded. If you have any objections you may disconnect at this time. I'd like to introduce one of your speakers for today, Mr. Gordie Beittenmiller, executive vice president and chief financial officer of Comfort Systems U.S.A. Sir, you may begin.

Thank you and good morning everyone and welcome to Comfort Systems' fourth quarter earnings conference call. At the start, we want to remind everyone that our comments this morning as well as what we issued in our press release, contain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995.What we say is based on the current plans and expectations of Comfort Systems U.S.A. Those plans and expectations involve risks and uncertainties that could cause actual future activities and results of our operations to be materially different from those set forth in our comments. With that said, I would like to turn the call over to our Chairman and CEO Bill Murdy.

Thank you, Gordie. We have Gordie here as well as Norm Chambers, our president and COO, and questions should follow our remarks here. You know, we reported yesterday afternoon for the full year in the fourth quarter on a net income basis, we're reporting a profitable fourth quarter, excluding discontinued operations, reporting profitability for the full year, but are projecting a loss in the first quarter from continuing operations comparable to the first quarter of '02. And while our overall profitability for the year is some measure of success, we didn't nor are we currently meeting our goals. Our cash flow is positive for the year. We maintained a strong balance sheet. And while all this is disappointing, we can find some explanation in economic conditions which not only depress our revenues but cause margin compression via competition. The last 15 months have been some of the toughest in the construction/construction services sector. The last---most difficult in decades, as a matter of fact. We judge by all we can gather here, that the sector is down 15-18% year over year. That's the sector I'm referring to is the commercial, industrial construction arena. And that's where the bulk of our business is. And while---by virtue of the fact that 50% of our work is in the maintenance service and retrofit area, we are partially insulated from that construction cycle and downturn, we are certainly not immune from downturns this negative. We have also had some problems and some underperforming projects in some of our operations. But we could not have achieved even the results that we have without having prepared and reacted to a declining business environment over the last months. We are putting our balance sheet in good shape with the disposition of certain assets early last year, for cash and focusing on the basics has helped us and will continue to do so. However, as we have announced yesterday, given the continuation of a very challenging business economy, construction economy, we are in the midst of making significant cost cuts, significantly at corporate and as well in the field. All in response to those challenges. We remain, however, confident of our resiliency and believe we're very well positioned to take full advantage of any upturn in the economy. And consequently, in the same release that I referred to here yesterday, we are projecting that we will be profitable and cash flow positive in Q2 and we will post improved earnings and cash flow for the full year vs. the full year of 2002. I certainly want to take questions but I'd like to pitch this back to Gordie to cover some of the financial results in a little greater detail.

Thanks, Bill. As Bill noted, tough conditions out there. In those conditions, revenues were down 7% as we continued to contend with one of the tougher stretches we have seen in some time in the building and facilities sector. Our gross margin declined 240 basis points as compared to last year's fourth quarter and 180 basis points from the third quarter. This decline arose from underperforming projects at certain of our operations, reduced results in our national accounts group, and a continuation of a broadly tougher pricing environment in the market. SG&A declined both year over and year and sequentially. In last year fourth quarter, we reflected a $3.5m reserve for Kmart receivables. We settled our receivables with Kmart for almost $1m better than that reserve in the second quarter of this year. Excluding that reserve from last year's fourth quarter, SG&A still declined 5% primarily due to significant reductions in corporate office costs. Difficult industry conditions have continued into 2003 on top of the fact that the first quarter is traditionally the period of the year when we see seasonally reduced activity levels to begin with. Additionally, we have experienced additional underperformance on certain projects in the first quarter. Further, we have undertaken some restructuring steps, downsizing our energy efficiency initiatives initiative and revitalizing our national accounts group. As a result of all these factors, as Bill mentioned, we expect to report a first quarter loss comparable to last year's first quarter loss. We believe our first quarter underperforming operations and projects are contained. Nonetheless, with continuing current weakness in the facilities sector, we are also responding with significant cost reduction steps. While market conditions are challenging, the experience, reputation, and staying power of our operations have put us in a position to retain work. Backlog at year end was up 7% from last year. We did remove one sizeable project from backlog in the fourth quarter that we now believe will not proceed. This project went into backlog originally in the third quarter of 2001. And therefore, it was in our backlog at Dec. 31, 2001. If this project is excluded from last year's total, backlog as of year end 2002 was up 11% from year end 2001.While we do not yet have final March numbers, indications through February and early March are that backlog has held relatively steady through the first quarter. Based on all these factors, project underperformance that is contained, restructuring, cost reductions, a reasonable backlog position, we expect to be profitable in the second quarter and for the rest of the year. We also expect, as Bill noted, at full year 2003 results will exceed 2002's. In the first quarter of 2002, we sold 19 operations to [Emcor]. Under our agreement with [Emcor], we provided certain guarantees in connection with the operations we sold. In late 2002 and through the first quarter of 2003, [Emcor] brought certain claims to us relating to the transaction. We have reached a preliminary settlement agreement with [Emcor] that addresses all of these claims. We recorded a charge in discontinued operations in the fourth quarter of is $1.2m after taxes that includes this preliminary settlement agreement as well as an improvement in our tax position on this transaction over our original estimates. As we suggested when we released our third quarter results, after a strong second and third quarter on cash flow last year, we saw reduced free cash flow in the fourth quarter. We came in at a negative $800,000.We did end 2002 at our lowest debt level on record. As we previously announced, though, we had additional tax payments due on the [Emcor] transaction during the first quarter of 2003.And with tough industry conditions continuing, we expect mixed cash flow performance in early 2003. Based on these factors, we expect we will report a debt level of approximately $24m for the first quarter of 2003, which still keeps us at a relatively low level of debt. We would note that in today's credit markets, credit agreements and related covenants are written much more tightly than they were a few years ago. With reduced results in the fourth quarter, we did violate one of the covenants of our credit agreement. That violation was waived by our lenders. Based on our expectations of lower results in the first half of 2003, our lenders reset covenant levels for this year. While as we noted above, covenants are written more stringently these days, with our relatively moderate amount of debt in comparison to our EBIDTA and cash flows, we believe we have we will have sufficient cash capacity to meet our needs. We continue to have a well diversified base of business with 31% of revenues this quarter, the fourth quarter, in the institutional sector ,which is healthcare, education and government and 17% in manufacturing, 12% in apartments and 12% in office buildings. Another indication of our sound base of business is the fact that our largest customer is less than 2% of our revenues and our top 10 customers represent seven different end-use sectors in eight different operating units. Overall, while we didn't meet all of our goals in 2002, we did post profits from continuing operations. We did produce positive cash flow and substantially strengthened our balance sheet in one of the worst years our industry has seen in decades. While we expect a loss in the first quarter comparable to last year's loss, we do expect to deliver better full year results in 2003 and to be well positioned to take advantage of any improvements. With that, I'd like to pitch it back to Bill to wrap up.

Thank you, Gordie. I think what I've said, what Gordie said is a mix of disappointment in the past, some of that very importantly influenced by economic conditions and general conditions. But a---confidence in the future, confidence in our own resiliency and ability to deal with the future. We're not looking at a robust economy in the first two quarters of this year. We think we can deal with that. We are dealing with it. And as we've both said and as announced yesterday, we expect profitability for the second quarter, and actually better results for this year than last with positive cash flow. At this time, I think questions are certainly in order and we'd love to entertain those from anyone on the call.

Thank you, sir. At this time we're ready to begin the formal question and answer session. If you'd like to ask a question, please press star one. You will be announced prior to asking your question. To withdraw your question, please press star two. Once again, to ask a question, please press star one. One moment, please. Our first question comes from Mr. [Mike Baldwin] from [William Blair].

Hi guys. How you doing?

Hello.

You suggest that you expect improved operating results for 2003,and I just want to quantify that a little bit more because, if you look at 2002, after the different charges you took, you made $0.14 in earnings, but you took a $0.03 restructuring charge and then there was also an $0.08 aftertax interest charge. So when you say you expect improved operating results, are we looking at better revenue, are we looking at improved operating income, are we looking at improved earnings? If you can help me with that a little bit.

More precisely, Mike, we are not looking at greatly improved revenue environment, probably flat to slightly down. The improvements would be in the margin lines. And when we say improved results of '03 over '02 we're talking about earnings per share from continuing operations excluding the unusual items or discontinued operations items.

Okay. So EPS from continuing operations. So should we add back -- should we add back the $0.03 to that $0.14 number so we're looking at improved results over the $0.17 number?

We expect to see improved results over both of those numbers for the full year.

Okay. Gotcha. Also, too, can you talk a little bit more about this covenant now, you violated a covenant and the bank has waived that but now you've got more stringent covenants going forward, and do you have some issues here, then, in the first quarter?

We do not for the first quarter. And although it's the first day after the end of the first quarter, and we certainly don't have final first quarter numbers yet, based on everything we see and in our analysis and our work on it with our lenders, we do not expect any covenant issues in the first quarter. And as I said in my comments, in today's environment, covenants are written a little more tightly than you would typically expect, particularly with as moderate to low a debt level as we have and given our track record. But even with reset covenants in that environment, we do not expect covenant issues in the foreseeable future that would affect our financing capacity.

Okay. And then one final question: with the stock trading down where it is right now and the kind of cash flow generation you're talking about and debt reduction, so forth, I mean, it would seem to make some sense to be buying back some stock down at these levels.

Well, I'll go back to my comment about a tough credit environment. In today's credit environment, senior lenders are not supportive of buying back stock.

Okay.

And that is not an alternative that's open to us at the present time.

Uh-huh.

But if we produce results this year as we have indicated we expect, I would look for some loosening there in the future.

Okay. Thanks guys.

Mr. [David Uchek] from [Sanders, Morris and Harris] you may ask your question.

Let's talk a little bit about the contract problems you have on some of your projects. Could you elaborate on some detail there about how much we're talking about in the way of---because it sounded like it happened in the fourth quarter and will probably end here in the first quarter. But---so we're talking maybe a three or four-month period here where you had some problems with some particular customer or contracts. Wanted to know how many there were, how much it may have cost you, and what were the issues, and how are they being corrected?

David, this is Norm Chambers. I'll try to answer that. We have had a couple of contracts, one in particular in Arkansas, which was a---a one-time, you know, contract where we have had experience in this type of work before, but frankly, had some project management issues surrounding our ability to control and expedite, you know, labor as successfully as we would have liked. And that project is near completion. We expect to have it completed before the end of this month. And therefore have taken---taken full charge to see that project through. We, additionally, had some other projects from one of our companies that travels, particularly in some, I would say, categorize it as job loop, job loop issues, primarily in estimating, which we have been in the process of both being sure in identifying what those shortfalls are, taken necessary reserves to protect ourselves, and have changed out the people and the process that was involved in that. And I think that that, you know, when we speak about it being contained, you know, we believe that is the case and we certainly have got very good visibility, particularly in these two areas. And when we look over time, over the last two or three years, the types of issues that are represented by---you know, by projects that have gone astray---have greatly reduced in terms of the number and their frequency, but these two definitely have slipped out on us. So there's a couple of projects and they're dealt with.

Any idea what the---what's the quantifiable amount on those two? And are they in the fourth quarter and the first quarter both and how much in each quarter?

Dave, this is Gordie. The situations that Norm just described are principally two: The project in Arkansas and a number of estimating issues on projects at one of our operating units. In total, those issues are approximately $3m pretax. A portion of that, less than $1m, was recognized in the fourth quarter. The balance of it will be recognized in the first quarter and contributes to the expectations of loss in the first quarter.

So you've got $2m in the first quarter. Now, is---

This is Bill Murdy. Let me add something that helps more in the prospective sense. And Norm did mention it. In both instances, in both these operations, there have been substantial changes made, leadership, process, etc. We'd also mentioned a third operation wherein a problem of a different nature, work which was depended upon simply did not materialize. We lost a couple of contracts, some others were postponed. In that instance, we are combining two -- now combining two companies and changing that leadership not entirely in response to missing these jobs, but we are -- the point is we are taking vigorous action immediately on these areas which we think are isolated. They are nonetheless -- they nonetheless impact our performance, and we are simply not waiting to see if things get better. We're working on them immediately.

Just a quick question for Norm, because I think, Norm, you joined the firm, in, what, the fourth quarter, wasn't it?

Yeah, in November.

I guess right away you must have dug in your heels and, you know, that's one of the reasons why you were brought on, wasn't it, to try to bird dog these things with a little more intensity from an operations point of view?

Sure, we've got a very good team here already but that was the focus that I was asked to bring and that's what we've been doing. Bill touched on some of the restructuring in terms of moving -- you know, moving our, you know, organization ahead and that's what I've been dealing with.

Okay, well, it sounds like at least, you know, at this point in time that we can -- you've covered most of your issues in the past but you always have a few things that can slip under the cover but certainly with you there it should help on a go-forward basis. As far as the national account initiative that you also talked about, kind of a revitalizing that, you just brought in another individual here, just last week, on your announcement, could you give us a little color as to what you're doing there that you weren't doing, and what your expectations are as far as where you're targeting the initial effort in national sales?

Right. That's a -- that represents, you know, a very positive look at the future. We certainly have made great strides over the last year or so in terms of consolidating and focusing our national accounts move and drive and use our software, you know, package which enables us to track our -- you know, track our assets or the assets of our, you know, customers in a very effective way. And we certainly saw that while we had made some very positive gains, there was still much more to be done. And when we looked at some of the parts of our company we found that the customer base we were speaking to wanted to speak not just about national service but speak about controls as well. So we decided to restructure our approach and in fact pulled together the very best of our controls, you know, a company that had been focusing on national accounts, combine that with our -- with our national accounts, you know, service piece, and in so doing, greatly affect our work process flow as well so that we will see a -- a real reduction in the cost of providing national account, you know, service which is the monitoring, the dispatch, and the actual execution of the work. We have moved that -- that group from -- from Cincinnati to Indianapolis, where our -- where our stronger controls company is and very pleased that we have Chuck Diltz, who comes with a very good, you know, background and exactly the right kind of managerial experience to lead that group which consists of our strongest operation and our best, you know, sales group. We are already seeing traction in that move. It's clear that the quality of service that we -- that we -- that we have -- that we provide will differentiate ourselves. And I'm -- you know, believe that that will be a very interesting piece of our business which we feel strongly can be an important part of our growth over the next, you know, two or three years and we expect to grow that profitably from day one, not -- not something that we would hope to be profit in the future, it will be profitable from the beginning.

Is there any particular areas or markets that you're particularly targeting on?

We have broken it into regions and, you know, sectors. We certainly have -- have been focused on the -- in the government side which we, you know, find in terms of the, you know, government, you know, municipal piece. We have, you know, big box -- our big box retail operations look good. Our primary --, you know, focus is clearly on the unitary side of the business and we've got great space in there and, you know, making some -- got some good traction.

One last question on the covenant issues on your credit facility. Gordie, how much can this restructure early in the year until you begin to ramp up, you know, get the margins back where you want them, revenue potentially improving from not only the economy from some of these initiatives you got internally with national sales and so forth. How much could that potentially restrict you vs. having to generate cash internally to get the job done for your financing and requirements for working capital, so forth, so on?

We don't have a bottomless checkbook in terms of our credit capacity, but as we project what our needs for cash will be as we ramp up for the heavy season through the middle of the year and as we undertake these restructuring initiatives, including NSG, we have sufficient capacity based on expected results to finance all of that.

So you don't -- at this point in time you would not think you could get to the upper limits of that -- of your credit facility? Based on what you need from working capital and ramp ups and everything else?

Well, Dave, I will say, as I said before, the covenants are written for more tightly at least days so I don't want to suggest it's impossible to get to limits. However, based on our expectations, we've got enough capacity, and even if we did get near limits, given the overall strength of our balance sheet, given the progress that we are even now showing in our results, we do not expect to have any significant financing constraints.

Basically what you're saying is if I'm approaching my limits it's because I'm getting a good revenue and recovery in the business?

Because good things are happening.

Good things are happening and banks always let people borrow when good things happen.

And we would be coming into, you know, the strongest period of the year.

Okay. Thanks.

All right.

Mr. [Alan Weber] from (indiscernible) Company, you can ask your question.

Good morning, a few questions. You know, you said the first quarter the loss would be similar to last year's quarter. And it's kind of like the first question. When I looked at it quickly, the first quarter last year, it looked like, from continuing operations it was an operating loss of $2m. Is that what you're referring to?

Let me make sure I'm looking at the right things. Yeah, here's how I would lay it out, Alan. I think we will have a slightly larger operating loss, including restructuring, than in this year's first quarter than last year's first quarter, but we will have considerably less in nonoperating items, interest expense, in the first quarter this year vs. last year such that pretax and bottom line will be comparable.

Okay. And on that note, on interest expense, when I looked at it quickly, it looks like -- was it $1m of interest expense in the fourth quarter?

I believe that's correct.

And given your debt, is there something in there, I mean that just seems too high, given the amount of debt that you have, or is there seasonal thing that there's different debt at the first quarter?

Now, interest expense includes for us not only the pure rate that we pay on borrowings outstanding, it also includes when we arrange new financing, we incur costs, the financing that we arranged in the fourth quarter last year we incur costs to establish that, upfront fees, professional fees, and in the case of this most recent financing, a discount associated with warrants. Those costs are amortized in to interest expense and so they add to the pure rate that we pay on interest expense.

Okay.

We also have, you know, a small fee for unused commitment as well. So that's why you see a little bit more than you would think looking at the market rates in the paper every day.

Okay. On to the company. You know, I think you said you ended the year, is it about 84 operating units? Maybe it sounded like -

There are 84 locations in terms of physical addresses. Our operating units are just a little more than 50 independent operating units.

Okay. And can you just talk about, you know, the number of those that are, you know, not profitable? Whether you include these cost overruns that you talk about in the fourth quarter for '02 or even for '03 how many of those continue to be, you know, not profitable and kind of what magnitude they pull down the company?

Well, we noted earlier, in response to [Dave Uchek], that there were $3m worth of issues that essentially operations that we think are now contained. We also had reduced results as we went through a transition in our national accounts group in the fourth quarter. Beyond that, there are between five and 10 units, I believe, that experienced losses. Some of those are in -- well, most of those are in response to the tough operating conditions that we're in. And we may see something similar to that in the first quarter since it is traditionally -- this is our seasonally lowest quarter and we are still experiencing some headwind in the market before the middle of the year season ramps up. Even with those external factors, we have a clear goal to have no units that are losing money, and we will push actively toward that throughout the balance of the year.

And just to add a bit, you know, we have active intervention in every single company that is showing any, you know, weakness. We have a job -- a process that is in place, and even in the face of the cost cutting that, you know, we're doing, that will be vigorously maintained and will prevail so that the -- the regional vice presidents, the presidents of our operating unit companies are very focused indeed. And there's great new peer pressure to be brought to bear for focus to turn around their operations and that peer pressure is also used in terms of, you know, helping out. So I'm -- you know, I'm -- while I'm never happen with loss-loss-making operations, I am very pleased indeed with the level of attention, the focus that we're you know, bringing to bear on this. And we'll be, you know, working to -- to make sure that we get everyone moving in the right direction and back to the in the black.

When you talk about cost-cost-cutting, putting aside what you do at the corporate office, you know, in the field per se, is that addressing kind of the on the new construction side of the business? I mean, because you said earlier on the maintenance side, you know, I guess there's some pricing pressure, but you should have some level -- I mean, I would think on the maintenance side, you know, that should be profitable at all the units?

That's -- you know, that's generally correct. What we're really looking at is really having a fine look at our unassigned. That's, you know, field labor, that is not, you know, utilized, you know, to its fullest and that's -- that's always a difficult one because, as we know, our operating folks want to hold and maintain, you know, their good people, but we're really challenging them through our regional vice presidents to -- to really, you know, look at making sure that their field labor is right-sized to their backlog. And to be sure, you know, this is a very individual conversation from company to company. We're not looking at across the board moves here. That's, you know, a much more, you know, focused and precise approach. And we're also looking SG&A. And we have very strict and strong, you know, targets and, you know, benchmarking. So we're in that, you know, process right now. We've got, you know, great support and enthusiasm for tackling this. And, you know, and we will see the results of this in Q2 and Q 3.

Alan, this is Gordie. I want to correct one comment I made a couple moments ago. We will have just over 10, not less than 10 units that probably experience a loss in the first quarter.

Okay. And just -- and you talked earlier about the national accounts.

Yes.

You know, you talked about the company kind of decentralizing. You just said there's conversations, you know, at each unit. So how do you do national accounts when it's a -- the company is set up kind of in a decentralized fashion?

Well, one of the ways we do it is that through national accounts, they contract with our, you know, customer. And then we establish a dispatch and a level of service within a 60- or 100-mile radius from our companies that participate in this that have, you know, service operations. And we can cover just under 4,000 sites with our -- you know, with our companies. We then have prequalified third-party affiliates who then give us additional coverage as well. And, you know, this is -- this is -- this is a system that, you know, that serves us as well.

Okay. Back to my other question. On the cost cutting, you talked about just so I understand it's kind of you trying to manage a fine line because the maintenance side, if you can allocate it that way, should be profitable, and you're trying to address what what's the proper cost structure so you don't have to wait too long, you know, you don't want to spend a lot of money waiting for new -- you know, for the construction industry to improve, is that kind of what you're trying to balance?

That is exactly correct.

Okay. And that's the -- okay. And the last thing was, you know, as you -- as you look at the downturn of the environment last year, you look at the results first quarter, how do you look longer term, you know, kind of what I've asked before, what do you think the margins, you know, obviously not this year, should be longer term, you know, gross margins, operating margins like that for the company?

This is Bill Murdy. First of all, longer term in the general economic sense you've got to go back to very fundamental things here, Alan. We believe and we know we're in an essential part of an essential industry. Certainly in the -- as far as our maintenance service, retrofit goes, and we believe that we have a presence in the mechanical contracting sector for new construction that will stand us in good stead in that area as well. We believe that we can -- the -- the economy, the construction economy, the cycle will allow us to return to more typical and traditional margins. Our margins by the way, our gross margins are a combination of those available in the construction sector and those available in the, quote, service sector, service being maintenance, repair, retrofit. The gross margins in the latter are higher than in the former and the combined comes out to be something that is very respectable and with our structure can be very profitable overall. So we are in a space here that the construction sector's not been in 25, 30 years. You know, by all reports, I mean, there's just -- there isn't discretionary spending going on by businesses right now. Or if it is, you know, it's minimal. So we need -- we'll admit, we need the cooperation of a little more robust economy. We're not just waiting for that, though, we can't -- we've got to get across this swamp, that's why we've instituted the cost-cost-cutting and the focus on our basic disciplines here to get across that. But we do believe out there that based on the fact this is -- this is an essential sector and has in the past demonstrated that there are good margins available and net profitability and certainly, you know, positive cash flow available, you know, we get back there fairly soon.

Okay. All right. And I guess -- and I guess -- but I mean it gets back to the same point, a lot of it is how much -- how long it takes for the construction side to improve and how many how much adjustment of the costs you do in between.

That is an accurate portrayal. Although we are insulated a bit. We are not entirely new construction.

No, I understand. Well, that's why you do in aggregate for the year, some profits because that's basically going to come -- the maintenance side is going to carry the company pretty far in a down economy.

We believe so.

Thank you.

There are some areas of the country that are still quite strong so that's it's not a homogeneous economy that we're seeing, it' it's -- you know, we have very strong local markets in some parts of the country. And that's a very -- that's a very good thing for us.

I believe we have another question in the queue.

Yes, sir. Mr. [David Uchek] from [Sanders, Morris and Harris]; , you may ask your question.

Quickly on the backlog quarter sequentially declined, don't know if that's a function somewhat, too, of the seasonality vs. what you're seeing in the first quarter, looks like it's kind of holding its own relative to the end of the fourth quarter. I just want to get a sense to as to where you saw the weaknesses in the bookings in the fourth quarter relative to your own expectations and where you're seeing weaknesses and strength in this first quarter that's keeping it where it at least was at the end of the year.

Dave, a couple of comments on that. You normally expect to see some decline in backlog in the fourth quarter as you come off, you know, a third quarter of seasonal activities. As we said in the third quarter our ending backlog at the end of third quarter was better than we expected as we booked some additional business in that quarter. So we saw less of a seasonal drop off in the third quarter to begin with so we were starting from some of somewhat of a higher vantage point than expected. Now, in my comments I noted that we had -- in the fourth quarter we took out of backlog a project that had been there since the third quarter of '01 that we now do not believe will proceed. That was in the September 30th backlog. If you exclude that project, backlog was only down about 3% from September to December. While we don't have precise statistics on this, I think through the end of the year and somewhat in the first quarter you're seeing a little bit of deferral effect in the backlog as opposed to booking new business as strongly as we did in the third quarter. Nonetheless, other than that one job, we have not seen substantial or significant removals from backlog. In the fourth quarter we saw some strength in San Diego, which, interestingly, we're seeing weakness in San Diego in the first quarter as -- as that market assesses how it's going to build going forward. We saw some continuing improvement in one of our mid-south operations. That we saw in the first quarter some -- that we haven't reported, seeing some improvement in op- -- what's in the backlog in our Washington operations. So it continues to be a mixed bag with a little bit more deferral activity. We are booking some new business. The tone is beginning to look cautiously better later in the year now that a little bit of the national uncertainty is addressed. So we will see how we proceed from here. But that's a little perspective on how things unfolded in the fourth quarter.

And is the healthcare area and the education market where you were getting some strength, is that still responding positively or are you seeing other areas?

You're always going to see more health or, I'm sorry, educational activity through the middle of the year because of the seasonality of schools.

Right.

And so it is a -- it is a less of -- it was less of a mix in our fourth quarter and in our first quarter backlog than it certainly was at the end of the third quarter as we finished things up. The institutional sector broadly though is still almost a third of our business from QtoQ. And there will be some retreat, certainly, in the state government arena as the states deal with their budget challenges. But that shift takes a long time to turn. It turns much more slowly than the private sector does, so there's still a decent amount of work there. And in federal, we think going forward, education continues to have a lot of investment going in it so we hope to see that continue through the end of this year.

That's all I got, thanks.

All right.

There are -- appear to be no more questions in the queue. I want to thank everybody for being on the call here and, you know, our view is -- has a bit of optimism in it. We know we've got some current challenges here. We are addressing them vigorously. And on the next call, we will be into more explanation of what we -- how we've addressed that and we'll have a much better view of this unfolding year. So we thank you for your attention, and see you next time.