Comfort Systems USA Inc (FIX) 2005 Q2 法說會逐字稿

Good morning or afternoon, everyone, and thank you for joining us today. At this time, we'd like to inform you that you are on a listen only, until the question and answer session of our conference call. This call will be recorded.

I'd like to turn the call over to Mr. Bill George, Chief Financial Officer. You may begin, sir.

Good morning, everyone. Welcome to Comfort Systems USA second quarter earnings call. At the outset 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 USA, 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.

You can read a more detailed list of specific risks in our Form 10-K and in our press release covering these earnings. On our call this morning are Bill Murdy, Comfort's Chairman and CEO, and Tom Tanner, our Chief Operating Officer. Bill Murdy is going to open our remarks.

Thank you, Bill, and welcome everyone. Comfort Systems is busy and our people are hard at work around the country. It is indeed their efforts that we are reporting here this morning. As indicated on our press release of last evening, net income -- not including the costs relating to the recent redoing of our credit facility -- was just over $5 million equating to about $0.13 per share on revenues of just over 240 million. Revenues in the corresponding quarter of 2004 were 202 million and, coincidentally, were 202 into million in the first quarter of this year.

Income from operations for the quarter was 3.9% of revenue, a substantial improvement over first quarter of this year as well as a slight improvement over the second quarter of '04. This improvement included some very fine performances by a number of our operations but, regrettably, underperformance by a few. Tom Tanner will address this a bit later in our prepared remarks.

Our backlog stands at a record 643 million and represents an appreciable increase from Q1 '05 and indeed certainly from Q2 of '04. Bill George will mention some changes in the way we are counting and looking at backlog in his remarks.

Especially noteworthy for this quarter, I think, is our cash generation in light of the working capital usage required to support an appreciably higher level of operations and as you see in the release we have reported substantial positive free cash flow.

Our balance sheet remains strong and we finished the quarter with $26 million in cash, and of course, previously announced the increased and improved credit arrangement with our banks which but for letters of credit we are not using.

Bill George, our EVP and CFO, will have further comments on the foregoing and he will be followed by Tom Tanner, our Chief Operating Officer.

Thanks, Bill. Although Bill reviewed our numbers I would like to comment on a few items. I'm certain many of you noticed a change in our historical backlog numbers. In prior quarters, the numbers that we reported for backlog included amounts attributable to our service maintenance contracts. These consist mainly of annual agreements that are renewable and which commonly are cancellable with written notice. Backlog numbers that we are reporting now and that we plan to report in the future will not include these service and maintenance contracts. We feel that our backlog numbers will be more relevant with this change.

SG&A was up by approximately 5.2 million over the second quarter of last year. Nearly a third of that increase resulted from less favorable medical experience compared to last year, and to additional accruals relating to the cost of Sarbanes-Oxley compliance. Although higher activity levels will cause SG&A to increase somewhat we are committed to hold SG&A increases for 2005 below our revenue growth.

We had positive cash flow of over 10 million in the second quarter. We were very pleased with this result in light of our large Ends investment and working capital during the quarter. As work continues to pick up going into a busy summer, we anticipate continued strong investment in working capital but we still expect positive cash flow for 2005.

Our balance sheet continues to be an asset for us, providing us strength, flexibility and a really helpful marketing edge in our industry. This quarter we completed a new senior credit agreement. In negotiating the new agreement, we feel we were able to make three important objectives. One, enhanced ability for the Company; two, greater flexibility; and three, lower cost.

Each financial covenant in the new agreement is more favorable to the Company than in prior agreements. The new agreement also provides greater flexibility for the Company in considering acquisitions and permits our Board of Directors to consider other possible uses of capital, such as dividends or stock repurchases.

Last but not least, our new interest rates are lower and the fees associated with end use capacity and with letters of credit have been reduced. Because we paid off the term portion of our prior bank facility at the closing of the new one, we currently have virtually no indebtedness and we currently have over $15 million in cash.

We recorded a non-cash charge of approximately $900,000 in the second quarter to write off the unamortized cost of our previous financing vehicle.

Finally, I wanted to note that during the quarter we sold a small refrigeration company in an all-cash transaction that resulted in a small gain in the quarter of about $200,000. The cash received in the transaction -- which was approximately $1 million -- was not counted as part of our operating cash flows.

That is it on financial so I will now introduce Tom Tanner, our Chief Operating Officer.

Thanks, Bill, and good morning, everyone.

It is definitely a very busy time in almost all of our operating locations. We just can't say enough about the effort and the results we are experiencing every day from both our construction and service team members. Execution coupled with safety remain our major emphasis. Our daily focus relates to the profitable execution of our construction backlog and improved execution in our service divisions. Relative to our strong backlog and our ability to execute, one of the exciting areas for us to watch is the way our operating divisions are working together to achieve better results.

We consistently see examples of our operations sharing business opportunities, technical expertise, and labor resources. Presently, one of our Washington D.C. units is sharing field labor with two other East Coast operations to allow them to approve their labor efficiency on specific projects. During the quarter, two of our largest companies acting as a joint venture began working on a major project that, individually, neither company would have undertaken.

One of our Florida operations will be working on a project with another of our Southeastern divisions to perform a critical phase of work to which it has substantial experience and expertise. Without that assistance, we would not have been successful in being awarded that project.

There have been several projects this year that one of our operations has secured as a direct result of a referral from a sister company. These are just a few examples of how Comfort Systems companies can add and do make each other better.

I also want to mention how excited we are about the continuing investments we are making in our Service operations. We are quite positive about our prospects for revenue growth and improving profitability in the very important Service segment of our business.

In reference to the increase in SG&A costs that Bill mentioned we are continuing to focus on these cost even as our revenue increases.

Overall, we still have our challenges and we still have operations that need to perform better. Our operation in Utah and two locations in California continue to struggle, although our California operations showed significant improvement in the quarter. Still, we do believe we have made real progress and we are optimistic about the future of our operations.

With that, I'll turn it back to Bill for his wrap up and in Q&A.

The story -- and it's not the story, it's just a fact -- of Comfort Systems is shown in the numbers here. We are happy with this quarter of -- and our performance. We believe that this continues and we're still -- while we don't give guidance -- still went to the notion and willing to indicate that our results for CY '05 will be better than those for Calendar Year '04.

We are seeing good conditions in the industry and we believe that moves well into '06 and even to '07 here. Our backlog will run out (indiscernible) in any of the jobs that we have contracted for will run out into that period even now.

At this point I think we can open it for questions and we hope there are some.

(OPERATOR INSTRUCTIONS) David Yuschak.

Sanders Morris Harris. Question for you, I was looking at the quarter. Your revenues came in higher-than-expected but your cost, cost gross profit SG&A were a lot higher compared to what I thought it would be and and I would think as business ramped, margins would be better and the tone of business would overall basically be more profitable. Was wondering if there's any -- when you mentioned California and Utah -- if there was any particular additional cost there because I think that's been an issue for you for some time and it unwound (ph) downsize Utah but I just wondered if there is any additional cost in those numbers that could suggest that they were burdened in the quarter?

There was some severance that related somewhat directly to those organizations. If you look at our SG&A on the face of the numbers you don't see much leverage on our SG&A but that is a little bit misleading as I mentioned in our remarks. We did have just a big increase in our medical cost for the quarter and it was mostly because we had very good performance last year. We did about what we expected to do this year in the quarter. We just had very good quarter on medical cost last year. So that created a bad comparison there.

We also had an increase in corporate overhead relating to Sarbanes-Oxley cost and the way that came about was, by this time last year, we were not accruing in our numbers a large enough number. Sarbanes-Oxley particularly, our fees to Ernst & Young ended up being considerably bigger than had been estimated for us earlier in the year. So some of the big SG&A you see can be explained with that.

But there is higher SG&A in the field. That relates with to things like commissions and bonuses and as far as Utah goes, obviously, when you have a company that has that SG&A and it's not contribution earnings that doesn't help you with your leverage on SG&A. So that's certainly a valid point.

But on the gross margin was on those incremental dollars sales was a lot less as well.

Don't think so. On the sales in Utah. On the extra 38. No that's not -- on the extra revenues they were -- when you look at our extra revenues keep in mind that 8 million of that came from granite -- our acquisition last year. On the remainder, actually, we think our gross margins ticked up.

Okay.

I don't know if you're looking at six months of the quarter, Dave, but gross margin is certainly up Q to Q -- six months is down but that takes our first quarter --

(MULTIPLE SPEAKERS)

Are you still there?

Yes.

Another question on the tax rate. Jumped quite a bit. Compared to what we thought, maybe about 42%.

Yes. The tax rate was a little higher than we internally expected it to be. Our guidance for the year had been and is 40 to 45% on our tax rate. The factors that caused our tax rate to be 45.2% for this quarter include some re-evaluations (ph) of some losses in some states. We had deferred tax assets on our books for the tax nerds out there. We had some deferred tax assets on our books that we had to revalue because of the prospects of using them, based on changes in state tax laws and based on our operations in those states had diminished.

Also very importantly, our tax rate is trending higher this year than we had expected for two reasons. As we've noted we had losses in California and Utah. Those two states both happen to be unitary tax states. They tax you on your nation -- a proportion of your nationwide income. So as far as state taxes go even when you lose money in those states you have to pay taxes. Then the last thing that's had our tax rate trend higher than we might have expected was the fact that our earnings, just this year, composition of our revenues has skewed a little bit toward higher tax states such as a Washington D.C. or some of the upper Midwest.

And so we have -- Iowa as an example. So we have some high tax states where we've had some good results and that makes you pay more taxes.

Just to conclude on all that, we stand by our guidance of 40 to 45% for the year although I'd say right now certainly looks like we will be about (ph) the midpoint of that range. We certainly -- we don't expect we will end up at the tax rate you saw this quarter; because as I said they had the effects of those valuation allowances which is under tax GAAP now you have to put the whole hit into a quarter.

Until about last year you smoothed changes like that into your tax rate but now you have to put any time you change an allowance, you change an estimate. It all pours through one quarter's tax rate and skews it a little bit. That's a lot of detail but it's really impossible to answer the question without it. I apologize for that.

One other question and I'll get back in the queue. As far as the backlog is concerned, was there anything in quarter to quarter (indiscernible) major projects. Could you give us an idea of how that broke out as far as where the activity was coming from, and the kind of levels you are seeing here in the second half of the year. Is the pipeline still looking promising?

We previously talked about big blockbuster projects, the Mendoda, California prison, etc. Tom, you want to address that?

There were no projects in the range of 20 million like the Mendoda prison that was booked in the quarter. A lot of it was multifamily work in the Washington D.C. area, in the Florida Panhandle, and in some potential projects in Atlanta. We continue to see a strong pipeline. We have had some good bookings in the month of July and we are optimistic that the opportunities remain strong in most of our marketplaces.

So most of those wasn't large projects then? For the most part.

No. There was not a project booked over $10 million, for example.

John Rogers.

D. A. Davidson. Good morning. I was just curious in terms of the pickup in activity that you are seeing, could you characterize it. Is it more repair upgrades or is it new construction? And how do you expected to play out over the next year or so?

We are seen a lot of both. Currently I think it falls more on the side of new construction and those are the things that book fast and the big. The retrofit changeout, big repair projects are usually smaller. It is an undeniable fact that the installed base out there is getting old. Summers like we're having in certain parts of the country will emphasize that -- the fact that a lot of that equipment has a long time in service aspect to it. So we believe that we are right about continuing repair retrofit jobs.

But we've seen a lot of new construction here and a lot of it -- there's even more on the planning board going out here. We are not de-emphasizing retrofit in order to get the construction. In fact, retrofit and big repair projects are our best kind of work. Usually.

We see both; and you have got to break it down by sector. Office is back. The multifamily residential high-rise and garden sectors are back. Schools work continues and there are gigantic announced budgets around the country for schools' infrastructure work. Hotels have come back and other lodging facilities. Even manufacturing, which shows the biggest percent increase, albeit of a smaller base and a dip in the '02, '03 period that was unprecedented. So we are seeing a lot of good activity everywhere.

Health care is a little flatter than it's been, but it just continues to be a lot of work. It's just the growth is not as much as it's been in the past. But it's at a high level anyway.

Then just in terms of operating companies or operating assets what's your plan there in terms of sales of additional small operations for this year?

That's a good question. I don't know if you had a bug in our offices here or not but we have some small operations that, frankly, (indiscernible) markets, small markets or having performed we are looking at divesting or making had a disposition of.

As we've said we sold one operation back to its former ownership, actually booked a gain on that in Q2 gain -- small gain on that. And these are all smaller operations. That aside, we've done some and I will let Tom speak to this. There's been some substantial downsizing in markets that we just haven't done as well in. And some of that is due to market conditions? Some of it, frankly, is due to our own performance characteristics. So Tom if you want to talk about that side of it.

We certainly and we continue to downsize our Utah operation as one method of improving its performance. And our goal there is to reduce our risk going forward with that operation. And we have looked in -- for example our operation in Hartford is, again, minimizing risks and downsizing some of their operation there although we can -- we have a new president there and we continue to see opportunities for great improvement from that operation.

So we've focused around I think Bill's comments about some of these other small operations. We are really focused on where we want to be in the future, what markets that we want to be in and we are reacting to that going forward.

(OPERATOR INSTRUCTIONS) David Yuschak.

Sanders Morris Harris. Another follow-up on cash flow capabilities here, gentlemen; as I look at it, you could probably have (indiscernible) $40 million in cash by the end of the year given what you have been able to do here so far in the first half and what you term pretty robust markets. Is that a reasonable potential goal of you?

I think that is a number we might see at year-end. I think the biggest factor that -- I'm pretty comfortable and confident in our ability to bill our projects properly and to collect. Our receivables are aging well. I think interestingly enough the most important factor in deciding where cash ends up at year end is just how good our activities levels are later in the year. Because the one thing that could keep us from a number like that would be bigger investments in working capital. I will tell you that that wouldn't bother us a bit if our receivables are up and they are aging normally, that's nothing but a good thing.

So cash is hard to predict. There are a lot of variables in the second half of the year but we feel good about our ability to flow cash.

With your margin, Bill, at 3.9 for the quarter, could you maybe just (indiscernible) -- you've talked a little bit about it in the past about the trends of your gross margin in the backlog. I don't know if you want to do that anymore or 'cause of some ways you recalculated your numbers in the past but just give us a sense as we've seen (indiscernible) very positive environment you should begin to see I think you guys are (indiscernible) in excess of 4% on operating margin. Now that we're getting close about what prospects are ahead there that could push this thing closer to, say, 5%. What things do you need to get you further up to scale on your (indiscernible)?

First just a quick comment on backlog. There is an increase in the gross margin backlog from the end of the last quarter. But I think we ought to just take that as indicative. It is very very difficult to get very specific or, frankly, very accurate about that. On the other side, the operating income. Clearly we are, Dave, as you know an average of all our operating entities and, mathematically, eliminating our losing entities is a very rapid way to raise the overall net and we are -- we continue to do that.

Of course we do that on the background of other improvements in other operations. I can't predict precisely the time when we cross over into the 4.5% OI area where I said, we constantly said, consistently said is the achievable and sustainable level of OI here. I don't know when that precise date is. We are certainly, directionally, moving that way. And it very importantly depends upon as, Tom alluded, execution of what we've got in front of us and eliminations of our operations which are simply underperforming. Underperforming at all lines.

So we remain positive and we are showing the right direction here to put some evidence on our projection.

Going back to -- you are kind of hinting that you can get to the 4.5% level if just some of the areas that are underperforming just get to a profitability, so to speak.

That would be the math. Sure. But it relies upon the notion that the other operations continue in their current or better mode as well.

One other thing to keep in mind. The 3.9% you are seeing you're seeing in the second quarter which is a seasonally strong quarter for us. So we still have plenty of work to do.

Our goal is to get to those kinds of numbers for a full year. That is going to we've definitely feel like we can make progress in that direction but it's something that we've -- I think we've shown over the last few years we can slowly but steadily improve the value of our stock by doing that.

One other question on your operations. In the past I think maybe (indiscernible) it indicated maybe there was upwards of six operations that really needed some review and work. Today, what does that look like and how far along maybe have you come in even solving what may be left in a way of underperforming assets? Under performing operations?

The key concern today and focus is on the Utah operations. The other operations that if shown on some operating losses are companies that for various reasons we do not believe the losses are related to long-term problems. As we stated our two California operations showed substantial improvement in the second quarter. Our only real major disappointment was in Utah. We have changed regional management. We have changed local management there; and we are downsizing the operation. And so we feel that we will see some real progress in the third or fourth quarter with that operation. That is the principal operation that we are concerned with today.

(indiscernible) actually down to one last in now you made progress on your various operations and (indiscernible).

(OPERATOR INSTRUCTIONS) Tim O'Toole.

Delta Management in Boston. I guess this is a quick question because you and -- I've got a shorter at least recent history of the Company. You stated that you kind of rejiggered the way you report backlog. Can you give me any sense for what comparative numbers would have been stated the old way? And I guess another way or another kind of thing I'm trying to do in terms of slicing and dicing this, what is the mix of -- I think I remember it as being approximately 50-50. But what is the mix of new installation vs. service and repair contracts? On the remedy side.

On your first question, the -- really it knocks about $30 million off of our backlog numbers for the last several quarters and a little less than that, just a proportionate amount less than that going back farther. So essentially you would just -- it's been about 30 million. It's been a pretty constant number. Two years ago it might have been a little less but that's pretty easy to answer. As far as the mix, we think Comfort is roughly half and half service retrofit and new construction. But in a period of an expanding economy like this, there is a dynamic that pushes the numbers the amount of new construction up and I would say we are in the mid '50s right now if I recall 55% new construction.

So in the long run we also think that we will trend more toward service and retrofit because of the way the installed base age (ph) equipment in the United States is ageing, but new construction is fairly steady but there is this great base of installed equipment out there that will need to be replaced and retrofitted and if you looked historically at our industry -- because air-conditioning is fairly new compared to other technologies. It became really widespread in the '60s, '70s and '80s. If you look historically in the '70s or '80s this industry was 80% new construction. Industry itself has probably gotten barely 50-50 now and if you talked to any of the major manufacturers 30 or 40 years from now the big majority of the work will be in the existing base. So there is a long-term migration from construction to service.

When do you think and it's not a true step function, obviously, but what do you think that magic number is for kind of -- installed base reaches or an installed unit reaches seven years and some major work needs to start being done on it. What (MULTIPLE SPEAKERS)

Much longer than seven years.

Is it more like 10, 15?

Yes, commercial, 15 -- more like 15 in commercial and industrial and that's affected a little bit by what's happening in the business cycle. At the time it's affected a little bit by what type of owner, certain types of owners where somebody else is paying the electricity bills which an awful lot of commercial construction is like that because they will tend to wait longer to replace because they don't pay you for the electricity. They pay for the replacement. (MULTIPLE SPEAKERS) probably a good number.

Is there technology in retrofitting the connection can actually save energy? I mean aside from just something working a little bit better because everything is in good order as opposed to some -- some kind of compressure technology that can be swapped in that would be a relatively expensive item that can improve operating efficiency in some measurable way. Is there anything like that afoot that they could actually try some of that?

An all-too short answer to your long question is yes. The manufacturers are very good at the train carriers -- Yorks, Linux, Aon Mcquay (ph) etc., are all very good bringing in those technological efficiencies -- compressors, pumps, as well. And we have not seen, frankly, the avalanche that is potentially out there from people being interested in energy efficiency which is the reason or one of the reasons you retrofit of course. And it's there, it's coming. We are getting used to believing that $60 oil price is the price or maybe higher and that is related to overall energy costs. And that, that's out there in the future, i.e., a HVAC business where one of the major drivers is energy efficiency concerns.

What are the economics in terms of a return on vested capital for potential customer that you could go market that or another way of looking at it, quick and dirty, is kind of payback period. Is it short or is it 10 years?

It depends on the application. It depends on the equipment.

-- a lot on the local price of energy (MULTIPLE SPEAKERS).

That's the biggest variable. I just mentioned -- there are still places in the country where people are paying $0.06 a kilowatt hour.

Right there's a new backyard or something right?

Or hydroplant or government regulated but in San Diego and Connecticut it's $0.18 per kilowatt hour so depends a lot on the location, the cost of energy, they delivery cost, all kinds of things here and the paybacks run from three to 10 years. Some (MULTIPLE SPEAKERS)

So, three years you can start to sell it pretty (indiscernible) selling point at 10 years people are a little less excited to do it.

Bill made a very salient point, though. We don't own our building here. We least it. And our lease rent goes up or total rent goes up with energy costs and the owner is recouping the additional cost of energy rate from us (MULTIPLE SPEAKERS) his motivation. (MULTIPLE SPEAKERS)

A couple of other things that come to mind also if you look at the service in retrofit -- actually first question is just out I'm on the right page is some proportion of what you consider retrofit actually reflected in backlog also? Because some of that stuff would be equipment that you might see some visibility on or not?

Actually any retrofit project of any size that goes into a company's construction backlog, it's reported to us that way and is included in our backlog.

So there is a non-significant element there. Then the second aspect of the question is, if you look at the service retrofit -- I think I know the answer to the question but if you look at the service retrofit these vs. the new installation fees what is the -- first off is the gross margin higher or lower for the service in retrofit and secondly can you give me a sense for the differential?

This is one of the grand counterintuitive aspects of this business. Construction is more risky but its margin is half of what service and retrofit is, which is not as risky.

So counter to normal considerations where margins would be higher. Where you take more risk it's just the opposite.

So that brings up another question, actually relative to the goal of grooming and improving operating margins. Can you, given that the mix in this part of the cycle does shift a little towards new, does that make it more difficult to really groom up and get the operating margins up a little bit from here. Or is the SG&A (indiscernible) applied there somewhat different? And does it really shake out of and it is something that can be executed on readily?

Lot of variables in this. And you've got some industry capacity variables as well. Remember, we are not -- we are doing relatively sophisticated commercial work. Where there is, you run out of capacity faster there than in the lower end of the spectrum here. So with that in mind, construction ain't a bad thing to be doing. It's a very good thing to be doing. But longer-term, we believe that we should be at 60% of working in existing facilities which is the way you define that sector vs. 40% in new construction. We're not there and in fact we're at 55% new construction.

But over time and the time is moving out by virtue of what Bill said about the fact that -- there's an upsurge in new construction here and it's a lot easier to go out and get a $5 million new construction project than create a new $5 million maintenance fee.

So the overall trend, we will -- our work will reflect greater work in existing facilities. But for now we are 55% new construction.

I guess I will jump off and see anyone else pops into the queue.

David Yuschak.

Just a couple of other quick ones on -- as far as you guys have generally given us some background or some ideas about where your strong markets were by your market category. Would you mind sharing that with us or -- and was there anything particularly stronger than expected maybe what may have been weaker than what might have expected as far as in a little more detail?

Kind of study, our San Diego operation has a very very strong record backlog record, backlog going forward that it is just starting to rev up into Q3. Our Phoenix operation has been -- it's consistently strong backlog for most of the year and they continue to grow revenue there of the -- a company in Orlando, Atlanta, Washington, D.C., Syracuse, NY, Manchester, NH, Madison, WI. All have record backlogs moving forward. Grand Rapids, Michigan. I mean our backlog in our large multi-family company Atlas (ph) . All our larger companies have very strong backlogs wherever their marketplace is throughout the country. We are very pleased with that at this point going forward.

As far as market sector continued to have great strength in multi-family other than that, the recent strengths have continued and a lot of institutional work so their hospital may be flattening. The people who project and call these things are telling us that offices may be coming back. They have been down since really 9/11. I don't think we've seen that in any numbers yet but we like to hear it. That's the only comments I can think of on the (MULTIPLE SPEAKERS)

We've had some very interesting projects in substantial projects in the manufacturing market in Buffalo, NY, Grand Rapids. In San Diego, and in Phoenix we haven't had in '03, '02 and '04. So we are seeing selected projects there that are substantial and our Company's very good at performing.

So what you're basically saying is it's broadening out regionally as well as by architecture (technical difficulty) category. (MULTIPLE SPEAKERS) the backlog and new business opportunities.

Yes even the Midwest which has been behind the improvement showed substantial -- our operations showed good increases in backlog in the quarter and for the first 6 months of the year.

How about resources right now? With that kind of activity building, how do you view your internal resources to continue to capture the potential that is out there as well as execute what you have?

We have adequate senior management here, David. I want you to understand that. No to answer you seriously, certainly they are going to be strains. In certain areas Tom very properly covered the way we can share resources and dupe both engineering and technical people -- so we are not at full capacity in aggregate. But aggregate's another good way to look at it. We are at full capacity in certain areas of the country geographically. So we are being very careful about that, very selective about projects, obviously, tending towards those which have the highest margins and fit with our expertise. It's not a time to get out of where your expertise lies.

So that doesn't completely answer the question because there is no complete answer to the question. We don't feel the resource -- I think net net we don't feel resource constrained so that it makes a big difference at this point. I don't know if you want to add anything to that.

I agree with that. We certainly have certain locations that have project schedules that have tested our labor resources but to date we have been able to react favorably to those challenges.

Last question. As far as with the heat wave and everything that's out there are you seeing more kind of emergency types of businesses coming there in the quarter? And also given the -- as you guys mentioned -- lot of the plant that's out there is aging. Is there any evidence this heat wave is putting pressure on some of those areas where that retrofit opportunity could begin to service itself, particularly when you get into a heat environment like we've had across the nation?

Certainly we have seen the increased activity at almost all of our service companies would change out work driven by the heat wave that has pretty much blanketed the whole country. We have very positive reports about that in June and continuing strong revenue in the month of July from those operations, driven by the heat, and it still continues to be warm today. Although the big bulk of that hits that first wave and compressors fail and they get replaced. So that we -- July will probably not be as strong a month service wise as June was.

But we certainly have seen it and it's certainly helped our results and should help our results in the third quarter.

So the strain is starting to -- with that kind of heat, was there any different from the past when as far as doing that retrofit, having to change out compressors and so forth -- anything -- does it seem like it accelerated because of the heat wave? The change-out process?

Yes, it would be. I think compressors clearly fail the more they are used and in the northern part of the country we've had the last 2 summers have been relatively cool, as compared to this year. So our -- for example our service operations in New York is seeing sizable increases in change outs of compressors this year as compared to the last 2 years.

And a lot of that is just older equipment you're changing out then?

Absolutely.

Mike Atlas.

Hello Bill. What does the Utah operation represent as far as your percentage of backlog and volume?

We really don't talk about individual operations. If we talk about Utah we would have to talk about all of them and that gets very detailed and there are 46 independent operations with more locations than that. Suffice to say that it is a very small single digit percentage of revenue and has declined, substantially, from the time you knew it. So and, nonetheless, we are very disappointed and we have some -- by the way we don't want to give short shrift to our small operations here -- we have some very very fine small operations that continuously produce above-average returns. But we just can't get into a line item on 46 operations.

So how many Company total operations are currently within Comfort?

46.

46?

Yes.

Of those 46 how many are performing would you say positive vs. flat? Can you give me some kind of percentage?

In our 10-Q what we told the world was that we had seven operations that had a loss for the first 6 months of the year of which 1 is just really nominal. So obviously the rest if you subtract that number the rest were profitable.

I know with the current construction boom, new construction should be doing very well for you folks. Good to hear it. Congratulations on the quarter and good luck moving forward.

There are no further questions at this time. I'd like to turn the call over to Mr. Bill Murdy.

Just want to thank everybody for being on the call. This is a business which is subject to many times we've said many times subject to management and we need to go back to work to managing it here today. So thank you very much for being on the call.

THIS CONCLUDES THE AUDIO PORTION OF THIS CALL.