Comfort Systems USA Inc (FIX) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Third Quarter 2007 Comfort Systems USA Earnings Conference Call. My name is Christy. I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. If any time during the call you require audio assistance please press * followed by 0 and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Bill George, Comfort Systems USA's Chief Financial Officer. Sir, please proceed.

Thanks Christy. Good morning everyone. Welcome to Comfort System USA's Third Quarter 2007 Earnings Call.

We want to remind everyone that our comments this morning as well as our press releases 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 listing and commentary concerning our specific risk factors in our Form 10-K that we filed this past March as well as in our press release covering these earnings.

On our call with me this morning are Bill Murdy, Comfort System USA's CEO and Tom Tanner, our Chief Operating Officer. Bill Murdy is going to open our remarks.

Thanks Bill. Welcome everyone. We are extremely pleased to report our strongest earnings in this century. The vast majority of our operations performed superbly in the quarter just completed, resulting in combined earnings 25% ahead of the comparable quarter in 2006.

Our operating income margin overall exceed 6%. Revenues in the quarter were down slightly from Q3 '06 due entirely to the right sizing of our Atlas multi-family operation. Later, both Bill and Tom will have some details there but essentially, Atlas is a very much improved story.

Our backlog at the end of the quarter stood at $818 million, up almost $100 million from the prior quarter and a full 20% greater than where it was at the end of the third quarter of '06. Importantly, the margin backlog looks strong and the work is spread out among our operations. That, with our improved execution capability, should result in continuing positive results on the project side of our business.

Along with our earnings, we've had very robust cash flow resulting from our constant focus on over billing in projects and collections. Again, Bill will have some more to say on that in a moment.

Results on a year to date basis are strong as well as we overcome the headwind provided by results in the first quarter, mostly due to Atlas again. Year to date, we are reporting $0.57 a share versus $0.52 a share last year and year to date revenue of $816 million is up 10% over last year.

I'm going to reserve some other comments for the end here and at this time would turn things over to Bill George, our CFO.

Bill?

Thanks Bill. Good morning again everyone. I plan to spend a few minutes to give you a little more financial detail on our revenues, performance at our large multi-family operation margins, cash flows, stock repurchases, the dividend increase, backlog, our tax rate, and an acquisition that we closed on the first day of the fourth quarter.

Revenues were up strongly in the first nine months of this year but third quarter revenues were down slightly coming in about $1.5 million lower than the same quarter last year. This flattening of revenues is temporary and is the direct result of the shrinking size of Atlas, our large multi-family operation that is based in Houston. Revenues at Atlas were lower by $21 million in the third quarter versus last year in the same quarter and for the first nine months of 2007, Atlas contributed $50 million less in revenues than in the same nine month period a year ago.

By contrast, revenues in our other businesses grew strongly during the third quarter. Most of the people on this call will recall that last year we experienced a brief period during which our backlog declined due to the shrinkage of Atlas. The flattening in revenues we are now experiencing is a manifestation of that transition. We expect that for the next few quarters, Atlas will continue to report revenues that are substantially lower than the prior year. Given our surging backlog overall, we are confident that this flattening is temporary and that as the strong growth at our remaining operations continues, we will be able to report full year top line growth, both in 2007 and in 2008.

Operationally, Atlas lost approximately $2 million in this quarter as jobs were closed out and claims and backcharges were asserted and discussed with general contractors and owners. Although the loss is once again far less than the prior quarter's, it is nonetheless disappointing. We are encouraged that the loss stemmed from third party claims and ongoing cost estimates did not erode significantly during the quarter. We expect Atlas to improve further in the fourth quarter and overall, we expect that they will report fourth quarter results that may range from another small loss to approximately break even. We continue to believe that they will contribute positive earnings next year albeit at much lower levels of revenues.

Tom Tanner will have more detail about Atlas and its results in a few minutes. Tom will also comment shortly on the strong overall results of the Company, where our operations generated a sharp increase in margins with OI margins despite the challenges at Atlas, reaching approximately 6.3% this quarter.

Our operations benefited greatly this quarter from good pricing traction and strong execution. Our operations were also very successful in generating positive cash this quarter. We had positive free cash flow of more than $14 million, more than twice the amount we reported in the third quarter of last year. You may recall that we ended the third quarter last year with negative free cash flow of about $5 million. This year we are already about $18 million positive year to date. We continue to believe that we will be very successful in achieving strong cash flows in the fourth quarter and we are optimistic that we will end the year with outstanding cash performance.

Our cash balance at quarter end was over $97 million compared to $88 million at the end of the second quarter. At quarter end we remained debt free. We were about to purchase approximately 225,000 shares this quarter at what we believe is favorable pricing. Subject to the requirements of the Federal Securities Laws, we plan to remain active but opportunistic in purchasing shares over the next few months.

Yesterday our Board of Directors voted to increase our quarterly dividend payout from $0.035 per share to $0.045 per share. This change will increase our use of cash for dividends from approximately $5.7 million per year to approximately $7.4 million per year. During the third quarter, including our dividend and our stock repurchases, we returned approximately $5 million to our shareholders.

As Bill mentioned, total backlog surged by nearly $100 million since June 30th, ending the quarter at a remarkably robust level of $818 million. The increase in our backlog represents virtually all of the primary end use markets that we serve. We are keeping a prudent eye on economic conditions. However, our operators and our booking statistics continue to suggest to us that activity levels and opportunities remain favorable.

Additionally, I want to note a couple of items. First, this quarter our tax rate was up somewhat, coming in at 38.5%. We believe that for the full year our tax rate will be in the range of 38% to 40%. We also booked additional reserves relating to our self-insurance program that created about $0.02 worth of headwind in this quarter.

Finally, I want to mention the small but strong service company that we purchased in Tacoma, Air Systems Engineering, Inc. As we explained in our press release, if they had been a part of Comfort Systems USA in 2006 we feel they would have added about $12 million in revenue and at least $1 million in EBITDA. We expect that their 2007 numbers will have been about 10% to 12% higher than 2006. They were acquired on the first day of the fourth quarter so they are already becoming a small but solid part of our mix. We believe that they are a strong company with a remarkable service footprint and reputation and they have very good potential to contribute steadily to Comfort Systems and to grow and to improve.

I will also note that Madera, the Company that we acquired earlier this year in Tucson, Arizona, has been a solid contributor since they joined the team and so far they have exceeded our expectations.

That's it on financials so I'll now introduce Tom Tanner, our Chief Operator Officer. Tom?

Thanks Bill. Good morning everyone. To begin, I would like to acknowledge and thank all of our team members for their ongoing efforts that resulted in achieving our strongest quarterly results since the third quarter of 1999.

A very large percentage of our companies had outstanding results for the quarter. Our results were highlighted by achieving an operating income of 6.3% and by generating more than $14 million of free cash flow. These results are directly related to our continuing focus on the key drivers of our business in both our construction and service divisions. These drivers include project and customer selection, estimating and pricing, and timely and productive execution. We are providing training on all of these topics for our team members at all levels of our Company.

Our mix groups for both our construction and service operations continue to share and promote best practices. We are committed to the use of prefabrication at all of our operations. We continue to benchmark all of our companies' performances against industry standards and their peer operations within Comfort Systems.

The Atlas group is certainly focused on the key drivers of its business and the progress exhibited this quarter was encouraging. Although the Company operated at a loss, all of the loss resulted from assessed claims and backcharges stemming from alleged project delays on certain previously completed projects in the Washington, DC, northern Virginia market. A very large percentage of the claims and backcharges related to alleged delays in the design and the installation of fire protection systems on these projects. We have exited the fire protection business and we will be substantially complete with only two remaining fire protection projects in our backlog, by the end of the first quarter of next year. Both of these projects are on schedule.

The Atlas backlog continues to decline to a much more manageable level and thus we are forecasting that the revenue for 2008 will be approximately 40% of the revenue as compared to their peak revenue year of 2006. A portion of the reduction in their backlog is related to geographical markets they are exiting. By the end of the fourth quarter, they should complete the sale of their Los Angeles and Las Vegas operations and they will have completed their final project in the Massachusetts market. They are also exiting the Florida panhandle where all but one project will be completed by the end of the year.

Atlas continues to focus on improving gross margins by using improved estimating tools, by the use of prefabricated systems, and by improving labor productivity. As the company continues to improve, we believe that the company should not negatively impact our fourth quarter results and will return to profitability in 2008.

It is again important to note that we strongly believe that the multi-family housing market is a profitable segment of our business. Many of our operating companies are currently achieving very strong results from their respective multi-family projects. The key, as with any segment of our work, is simply not to take more work than can be profitably managed.

As we saw in the previous quarter, our continuing focus on growing both revenue and operating income in several of our service divisions is producing improved results. To further implement our focus and commitment to the service portion of our business, we have recently promoted Kim Cotter to become our Senior Vice President of Service Operations from her previous position as a Regional Service Vice President. In her new role, Kim will be responsible for further refining and implanting the appropriate strategies to further accelerate the growth of our most profitable and predictable portion of our business.

We are also continuing to see that higher energy prices are driving opportunities for larger retrofit projects and for multi-year preventative maintenance agreements to reduce energy costs. Our energy services group, headed by Brewster Earle and his team of energy engineers is consistently working with several of our operating companies to provide our customers with a comprehensive analysis of their current and future energy costs. Our customers, both existing and new ones, are seeking our professional assistance in evaluating the energy efficiency of their current HVAC systems and then to provide them with the design and the construction services to deliver a turnkey, long term solution for their HVAC requirements. Oftentimes the appropriate solution will be a planned multi-year replacement of the existing HVA equipment coupled with a multi-year preventative maintenance agreement. We believe that this aspect of our business will continue to grow especially given the general belief that energy costs will continue at their current level or even increase over time.

As an additional important component of improving energy efficiency, we are also focusing on providing green building solutions to our customers as related to their HVAC system. The majority of our companies have LEED accredited professionals who are fully qualified to advise our customers on the long terms benefits of having a LEED certified building.

As we move into the last quarter of the year and then into next year, we are very pleased with the size, the gross margin levels and the geographical distribution of our backlog. We believe all of our companies have manageable levels of backlog that are spread over reasonable time periods. Thus we are excited about our future. Our companies are committed to making incremental improvements to their operations that will lead to increased profitability. Our backlog is at a record level with strong estimated margin and we continue to see solid pricing in our very active pipeline. We are focused on providing our customers with long term solutions to ever increasing energy costs. Thus we continue to believe that we will have improved financial performance in 2007 as compared to 2006 and we are currently optimistic that 2008 will have improved financial performance as compared to 2007.

I will now turn it back to Bill for his wrap up and then questions. Thank you.

Thanks Tom and Bill, and I want to make some looking forward comments, not forward-looking comments but looking forward comments here. Some of this is in a sense, a summary here.

As mentioned, our backlog is at its highest level ever and our indicative pipeline of business is also very good. Further, we are executing better than we have, even at Atlas and gratifyingly, we are seeing some very encouraging traction in our energy efficiency, energy savings oriented business, both in new construction and in the retrofit area. As Tom mentioned, rising electric power costs are increasing the opportunity for us to bring energy efficient HVAC solutions to our customers and schools and hospitals have been specific targets in this area and we have some very good examples of work going on in that area.

Further, our efforts to increase our service and retrofit component are, we believe, being benefited by greater end user energy consciousness. Service and retrofit by the way, as a percent of our revenues, moved from 43% in Q2 to 45% in Q3.

Lastly, our top line growth has been good. We've grown, as I mentioned before, 10% year to date. That's been benefitive to the tune of about $10 million from revenue from our Tucson acquisition of Madera which is doing splendidly. There has been overall growth in all our regions from current operations. Of course, that's been decremented by the $50 million downside year to date at Atlas.

With our substantial backlog, new potential projects, increased service, our revenues should continue to grow on a same store basis but we will also be growing by prudent acquisition of high quality operations. As mentioned in our release, Air Systems Engineering of Tacoma has joined Comfort Systems as of 1 October. Air Systems is a fine, very well established service oriented company with great continuing prospects in a very good market.

Beyond Air Systems, we continue to evaluate and negotiate other private companies around the country and are encouraged by what may come from these efforts in the ensuing month. So our picture, we believe, is very bright here and important to note is the move to increase our service and to capitalize in the right way on the energy efficiency opportunities that are out there.

So at this point, I think that's the conclusion of our prepared remarks and Christy, we could open this to any and all questions.

Ladies and gentlemen if you do wish to ask a question please press * followed by 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press * followed by 2. Press *1 to begin.

Please stand by the first question.

And your first question comes from David Yuschak of SMH Capital. Please proceed.

Good morning gentlemen and good quarter. Let's just talk a little bit about the Atlas operation because I think the way you described it, basically the losses in the quarter were kind of, even up the ledger on work past, that's been completed, kind of reconcile the claims against that. Is that basically right?

Yes. The work was completed. People were less than forthright with us as time went on and so they assessed these claims and backcharges as we forced them to close out and pay the balance due on their contracts.

Not our people. You're talking about outside.

Yes.

As far as the projects that created all the problems for Atlas, that was basically completed by the end of the second quarter so are you just kind of reconciling the balances of all those projects then, and basically like you said, in Washington, DC?

Yes.

So if you were to take a look at Atlas, x these backcharges, how did it look in the quarter from a profitability point of you?

It would have been slightly profitable.

Okay, and then I think as far as the comps on revenues, so we can a better handle on revenue going forward, when does the drag on revenue on a year over year basis -- because in this case it was down 20 versus a year ago -- when does that comp begin to break even with itself?

If they hit their forecasts in the fourth quarter, they would be $11 million less in revenues in the fourth quarter than they were a year ago and for the full year next year, their early budgeting suggests that their total revenues in 2008 will be about $40 million less possibly probably than their total revenues in 2007. Because their revenues ramp down over the year some of that will hit a little bit disproportionately in the first half of the year next year. The net of all of that is they'll continue to provide revenue headwind for the next few quarters, not as much as revenue headwind as they have sent our way this quarter or last quarter or year to date but still substantial. We started saying a year ago that 2007 would be more of a margin story than a revenue story and we were very explicit that the reason for that was because Atlas' revenues would be coming down and we would say I think the same thing about next year and there's an added factor there which is Atlas, the negatives Atlas contributed this year should be gone next year and that adds to the fact that although we do expect higher revenues next year, we expect to get our improvement from margin which is exactly where we like to get it.

As far as Atlas in 2008, with the minus 40 on say, the revenue, does that then suggest that you're not bringing back in as much new business? You're still kind of controlling what they are bringing in?

Well they -- go ahead, Tom.

A couple of things there, one, we've exited the Los Angeles, the Las Vegas, and the Florida market so we're concentrating our efforts in Washington, DC and the state of Texas, based here in Houston. We have exited the fire protection market in DC which contributed ten or $12 million worth of revenue in 2006 and a considerable amount in 2007 so we are focused on their pricing. Certain projects that they may have taken in the past, they're not taking today. So yes, all of those things contribute to getting the backlog to a manageable level with really good margins in it.

So some of that headwind is basically exiting the fire business as well as a couple other things.

Absolutely.

Alright, that's fine. Then one last question and then I'll get back into queue. Your backlog certainly suggests that business conditions are very strong and yet you read Dodge being very concerned about [inaudible] next year. What are you guys seeing on a micro basis that the F.W. Dodge data suggests contrary as far as the outlook in 2008? Is there something here that the big picture is not capturing that the micro picture is?

I'll take that if you don't mind, Bill. One of the things that you have to remember is that Dodge, the nominal numbers for Dodge increased 17% last year and they increased 7% this year and that's very good for us in two ways. One, what Dodge measures is when contracts are entered into so when a building is announced or the initial contract with the developer the GC has entered into, it's months later that we get our contract and obviously then over the next year or two that we flow the revenues so even if we were heading into a slowdown, that would not hit us for quite awhile. That said, if you look at the Dodge numbers and even if you carefully part through what was in the Wall Street Journal article a few days ago, what you see is the increases have been chopped off but the overall dollar amounts remain at these very, very high levels. Not quite as high as we saw in a '99 or 2000 when it was really in a froth but we did have from 2001 to 2003, three of the worst years, certainly the worst years in 30 years so there is a pretty substantial backlog of things that weren't built. And if you look across the board at vacancies, if you look across the board at the profits of businesses, have much cash they have to invest, if you look at the demographics of healthcare and the demographics of schools, I think there's a reason that Dodge still things these activity levels will remain very high and I'd say that we feel the same way.

So they've tempered their growth and they have, one of the out years they do have a small negative but on the other hand, we were profitable with the big double digit negatives back in 2001, 2002, and 2003 and we're a lot better Company now so we feel good about our ability to thrive and frankly, we look forward at some point, at some point -- this is a cyclical business. We will have a down cycle. We look forward to growing at that point by acquisitions.

Appreciate your comments.

The other comment that I would make is that in many, many of our markets we are the preferred contractor and so people are working with us. They want to use us based on our performance capabilities, our financial strength. And so even with a small downtick, it could have a negligible if no impact on our operations because of the strong companies that we have in these marketplaces. As the economy, if it slows, one of the things people are leery of is less financially strong companies and we certainly are very opportunist in that area to continue to grow our business.

Thanks a lot guys.

And your next question comes from Clint Fendley of Davenport. Please proceed.

Thank you. Good morning gentlemen and congratulations on a nice quarter. I was wondering if you guys could comment just a little bit more, obviously the backlog number is quite impressive. It seems to be spread across numerous industries and geographies. Is there any other color that you can maybe provide on that especially within the context of the Dodge report that we were just discussing?

Right, I just emphasize the fact that it is spread across the country, not to say that we don't have some weaker areas -- Buffalo, Birmingham comes to mind -- where there's not the vitality of certain other markets. There we just take market share, but we see it -- I think what you've got to remember is one, we are spread out. There are a lot of locations here. We are not in the super frothy areas. We're closing down our Las Vegas operation but it was, or at least the Atlas Las Vegas operation. It was never very large. We've not been in Miami. We have very limited exposure to some of the places that look like where the downturn is greater, if there is one.

On the other hand, we've got a very good indicative pipeline of work here.

In your past historical downturns, have you seen an uptick in cancellations and things that have been pulled out of your backlog as a result of the downturn?

I think the instances of outright cancellation are very, very limited. We have seen some deferred work where we haven't started at the time we expected it would but I can think of two?

In the ten year history of Comfort Systems, I can think of one really large, more than $10 million project that ever got pulled out. We don't put anything into backlog unless we have a signed, or some sort of customer acknowledgement that we're allowed to start spending money, that they've chosen us and the vast majority of our backlog if you look at it numerically is stuff that's already on the POC. It's what's left to complete of jobs we've already started. The jobs that are booked and not on POC are a pretty small portion of our backlog and if they're in there it's because there's been, you know, we've signed the job. By the time we're signing the job, because we get into these buildings mainly when there's a roof and walls on, by the time we sign the job, the building typically is going to get built. In the United States, you don't see half built buildings littering the landscape. Once financing is committed, the building gets built.

Okay thank you, that's helpful.

And your next question comes from Rich Wesolowski with Sidoti & Company. Please proceed.

Rich with Sidoti, thanks, how's it going?

Good.

Can you move the discussion we've been having here into what appears to be a more aggressive drive both in the acquisition you just made and also what you're looking for? Are you comfortable buying companies, even at reasonable multiples, that are based on boom time earnings?

No, that's a very short answer. Our acquisition model, if you will and of course it varies with circumstance, is based on a look back over the earnings of the entity over a period of time and since we're buying the future earnings, we look toward the future. And remember we're looking for balanced entities. We're looking for entities that represent both the new construction and service and retrofit. We believe the service and retrofit part is very important because it's the same sell through through downturns.

Thirdly, we're not looking in the big jurisdictions. We're not looking in New York, or Philadelphia, Detroit. We're looking in moderate to semi large areas where there is growth and we've done a lot of demographic work to be where we are and we're trying to find the go-to company in that area, the go-to non-union company in that area. We won't by able to buy, we won't come to terms that are satisfactory to both sides in many of the things we're looking at but we're encouraged by what we see and what we're able to talk to and I think there are some entities out there that honestly want to become part of Comfort Systems and we want them to become part of us.

Okay thanks. I noticed that the average project size came down about 10% during the past six months of when you've had your strongest bookings this cycle. Is it a reasonable assumption that because of the size of the jobs going in and because of the market conditions that the bid margins in the work you're putting in are at least as good as that you're reporting on the income statement?

I think that is a reasonable assumption and the main reason being the market has only been better since we've been booking the new work and we've had more pricing traction during that period and frankly, we've had a pretty strong object lesson about the fact that you don't want to book work beyond your resources. Since we've had that lesson driven home pretty well there's an obvious way that you limit the work that you book and that's by price.

Okay.

And the Atlas backlog being worked off has reduced the average project size.

Atlas had larger average project sizes than most of our companies so there is some mix there. It's one of the reasons our project size -- frankly, we're not back to as low as it averaged starting a couple years ago, for many, many years. We're still at a larger than five year average project size but it's coming back towards that and frankly, that's the market we want to be in.

Bill George, how much of the dollar SG&A increase came from incentive comp tier project managers as opposed to fixed overhead increases?

I don't know as a percent. I know that an awful lot of our -- we will pay millions of dollars more in bonuses this year to our Company Presidents than we paid last year and last year we paid millions of dollars more than they year before and it's because we have a very longstanding and we think very effective bonus program that leads them to share in earnings that they make above a certain margin, earnings and cash flow that they make above a certain margin.

A lot of our SG&A growth is driven by, frankly, good results because in an industry like ours, you want to be, you want to set up your comp so that it sizes itself sometimes to conditions and so we pay a lot of bonuses. That said, we have been making, and we went over this in some detail in the past, we've been making fairly sizable investments in future growth. We've been spending a lot more on training than we ever had in the past. Tom mentioned the new Service Senior Vice President. We have regional service people that we've added. We've been hiring new service managers and starting new service projects in certain places. We have new companies that we've started, for example, in Charlotte, that initially those companies are almost all SG&A as they get going. But we've had good success in doing that and we feel very good about those efforts but we are making an incremental investment through our SG&A line in future growth and our numbers would be better if we weren't right now but we think they'll be a lot better in the future because of it.

Okay and finally, just maybe a word on how your decision to use the remaining 750,000 shares of your buyback authorization hooks into whether or not you find one or more sizable acquisitions to make. Thanks.

We've increased the dividend. We intend to continue to buy stock opportunistically as Bill has said and we also intend to make acquisitions. We have run a lot of models here and given our current and future projections and cash flow from current operations, we don't think we're necessarily restricted here on any front, dividend, reasonable dividend, reasonable stock buyback, and acquisitions. I think on acquisitions the more logical limiter is how long it takes to do one of these and what we can absorb, assimilate, and properly go forward with rather than cash. And by the way on acquisitions, Rich, we're not going to use all cash. Our "formula" is a combination of cash and some debt we will put on our balance sheet, not third party debt but debt back to the seller and earn out feature amenities.

Okay, thanks Bill.

Sure.

And your next question comes from Steve Tussa of JPMorgan. Please proceed.

Hi good morning.

Hi Steve.

Good morning.

Good morning.

I appreciate the comments. One question, I think it was interesting you were talking about building managers' interest in the energy related services. I'm just wondering if that's a major change. I know that's always been a key driver from the HVAC side. Has there been a major change and if we do have a more dramatic slowing in the new construction that Dodge is forecasting, do you think that's enough to maintain maybe a little bit of a better growth rate relative to previous cycles?

We think so. We're encouraged by this. You've got to break this down. Mostly this tracks electric power costs. Electric power costs are different all over the country. I was in the Pacific Northwest last week, $0.05, $0.06 a kilowatt hour, in New England, $0.22 and Texas, $0.12, $0.13 and Arizona about the same. And then you have the load question. You need to have a load here so that electricity is running so you've got to be using it so that you can save it so what we're tracking in on is jurisdictions where there are high energy costs, high loads, and then the other side of this is there are certain entities that desire to be green, if you will, for the sake of being green although I think that we believe that the greenback runs the green revolution all the way, but -- schools and hospitals especially are this and governments, city, state -- we don't do a lot of federal work -- but there are certain entities that will go to -- and it costs more money on the front end clearly.

So what you're saying is regionally and sectorally, there is more incentive to change behavior. Has there been a change in behavior in those segments where you would expect?

It's hard to make it a wave. It happens individually, thousands of individual decisions but you're stating the case a lot more elegantly than I am and you're right. We believe it's a driver for the future. We're focused on this and spending a lot of time and effort moving that way.

Is there anything on the legislative front federally that could push this in the right direction?

It's sort of quasi-legislative, if you will. ASHRAE, which sets a lot of the standards here, has new standards for this. Some states do. California does at least, but they can't implement them except in, where the state has jurisdiction, i.e., its own facility.

I think it's going to be economically driven. I'm not looking to this administration or really even any future administration to put out any mandates about energy usage. I think there's too much free enterprise, free market in the economy to allow that but it comes anyway and you've seen on the residential side which we don't play in much, the mandate that requires a higher seasonal energy efficiency in equipment, in the manufacture of equipment that's installed and utilized in residential situation. I don't think that gets to commercial, industrial.

Right, and then one last quick one. I just want to make sure that I'm reading your comments clearly on the Dodge stuff. Are you seeing any kind of indications that this market will be down mid single digits next year or is there anything in your business that would lead you to believe that that's a good forecast today outside of everything you read in the papers?

I subscribe -- I don't mean I subscribe in the sense of buy. I mean I subscribe to Dodge. I think that's a very good organization and they do a very good job but that question, vis--vis the economy I'm not sure we'd have a lot of insight beyond what Dodge has. For us, you wouldn't expect us to see weakness. Weakness has to be quite a ways into the future. We get to the party late but we leave the party late so we're just a bad resource for seeing the weakness because even when everybody else sees it we won't see it for quite awhile and I don't say that to sell the stock. I just say that to be perfectly honest with you.

And then one last question, sorry. We always go more than a couple questions but one last question. Is there any chance of, I guess they would be your supplier, consolidation going on in the industry and how would that affect you guys?

We don't see it. You're talking about Trane, Carrier -- Carrier and York are part of somebody else already.

Yeah, right.

Trane is now on its own. Lennox is, I don't see them. We don't see -- and even if it were, I don't think that has much effect on us. We are entirely product agnostic and we like the competitive setup in the industry and I don't think a combination of a couple of those people is going to change it very much.

Great, I truly appreciate your comments, thanks.

And your next question comes from Tahira Afzal of Key Bank. Please proceed.

Good morning gentlemen.

Hi Tahira.

Hi, I just had a couple of questions on your backlog. Obviously this quarter is just phenomenally strong and as you look at your pipeline, should we expecting a similar quarterly clip as the one in this quarter or something between, let's say, the previous quarter and this quarter?

Is that a revenue question or a backlog increase question?

Backlog increase.

I would think that our backlog level is appropriate going forward. I do not see a large increase or decrease in the backlog going forward. We're very, as Bill and Bill have mentioned, all of our operations are very concerned about taking on more work than they can handle and so we are really focused on that so I believe we're at an appropriate level. Several of the projects in our backlog have lengthy durations of more than probably typically of 12 to 18 months so we're going to continue to focus on executing these projects and as good opportunities come forward they will add to our backlog and we frankly see some very good opportunities in our pipeline right now.

Tahira, I would absolutely agree with Tom save and except for the fact that in these discussions with the companies that we're talking to about becoming a part of Comfort Systems, they will have backlog.

Right.

And that's one of the things we really look for on a going forward basis. So we could be acquiring backlog as well as revenues.

Absolutely, but would you say that the $100 million increase as sequential increase in backlog, would you say that's something you would see going forward on a sequential basis or as more of a one time event?

If it's on a same store basis, I don't think we can -- it would be hard to imagine us handling that well.

Right, okay.

As Tom said. So, do we know for sure? No.

Backlog arrives and it can be very lumpy. If something has been signed by the end of the quarter, it's in and if not, it's not and so in any given -- over time, I do think our backlog will go up. I think it will go up as we grow but I don't think you can look for any more gigantic leaps like we just experienced. I think that was --

Okay.

To Bill's point, a lot of projects that entered our backlog in this quarter we have been working on for several months and it just ended up that they ended up becoming finalized contracts in this quarter and they got added to our backlog.

Okay thanks, and in terms of your backlog margins and I know several people have asked already, that the margins seem to be fairly strong and if you look at your margins in the third quarter you still had an overhang from the Atlas issues. In essence, given that your backlog right now probably has less of those issues and in fact, hopefully none, the margins are probably going to be the same or higher would you say?

We have -- certainly many, many of our companies are operating at very, very high profitability levels so I don't know that we can make that assumption. We certainly think over the broad scope of our companies that we can maintain the levels that we saw in this quarter but I would not expect a big increase from these current levels.

In terms of being a late cycle player, from your experience, how much do you think Comfort lags the construction spending cycle by?

I think about that a lot. I would say that we lag probably a weighted eight to 25 months. We would just start to feel something once it became established but it would phase in maybe a couple quarters later, three quarters later, but it would phase in over a year or two.

Right, and I guess the fact you're late cycle in essence gives you an edge over other companies that are concurrent with the cycle because you have more time to actually go through and make sure that you're covering all your risks.

As long as we pay attention. I mean, that's right. If we get hit by a business cycle and we don't see it coming it's pretty hard to explain.

Okay, fair enough and just one last question. It's interesting someone was asking about energy efficiency and green, I remember earlier on in the year there was a report out by ENR and they said that the margins associated with green buildings are actually turning out to be higher and I just wanted to see if you were sort of seeing that trend?

I wouldn't -- trend is a terrible word because it has a backward and forward looking aspect to it. We are getting very nice margins in this work, some based on the preciousness of it, if you will. We really focus on it. We concentrate on it and not everybody does it as well as we're situated to do it. But our models, we're not depending on higher margins in that kind of work. I don't know if Brewster Earle is on this call but I wouldn't want him to hear that.

Okay, thank you very much gentlemen. That's all I had.

Thank you.

Thank you.

Thank you.

And your next question comes from Susan McGarry of Granahan. Please proceed.

Hi, good morning.

Hi.

Good morning.

I was wondering what were the revenues from Atlas in the quarter?

What were the revenues from Atlas in the quarter? Do we have those?

About $21 million.

$23,902,000.00.

I'm sorry?

$23.9 million.

Okay, 23.9, and what was the loss from Atlas in the year ago quarter?

They were approximately break even. It was less than a $100,000.00 loss is what it happened to have been.

Okay, and how much Atlas is left in the backlog and how many more quarters will it take to burn that off?

I don't know that I'd say -- Atlas will get to what I think is a permanent run rate and then start to grow normally like our other companies, probably middle of next year but that's just a guess. Tom?

We're very optimistic that the bad projects in our backlog will be completed by the end of the year and we're again optimistic that the current backlog on the projects that they are working on today will be much more profitable than their past results and some of it simply relates to the fact that they're not overwhelmed with work that they didn't have people to manage.

And we've gone -- we're not going to be in the fire protection business. We'll be less in the plumbing business. We're going back to basic roots here.

And we're a lot few markets so it's easier to concentrate our management team in two markets rather than in about six.

So what's the Atlas level in the backlog currently?

It's less than $100 million down from a peak of $180 million.

And now just generally -- I know there's no precise number -- but what would you expect the run rate in backlog from Atlas to get to by the middle of next year?

I don't know that it would go a lot lower than it is right now. I think they're at a pretty normalized run rate because a lot of the work they're finishing has almost no representation in backlog. It's not being replaced. If you're not 80% done with something you don't really impact backlog. You have to be really careful though trying to draw inferences from our backlog because project size, project duration can overweight things temporarily in ways that are -- I think you and have had this conversation so I'm not trying to be repetitive but I'd be real, real careful about thinking you can take a backlog number and then get to the revenues very easily.

Right.

And you've got to remember, Atlas as opposed to our averages is not in the service business at all. It is a 100% project company.

Right.

It's a disproportionate share of a backlog which is only projects.

Right.

Right, so what was the Atlas work in the backlog in the year ago quarter?

About $145 million I believe.

I was wondering, Bill, either Bill, if you could go into a little more detail about which end markets are the strongest and also the weakest, both in terms of geography and also in terms of project type?

I'll take a shot at this. Clearly, geography is a little easier. Clearly upper Midwest with its challenges is the weaker part of the area. Functionally or end user base oriented, schools, hospitals, are very strong for us both in terms of backlog, revenue, and margin. I think we see a little bit of weakness in the retail area, the lifestyle malls and that sort of thing although there's a lot of service work there and our national accounts activity focuses a lot on that.

Talk about multi-family, multi-family is a fairly strong business and I think Tom mentioned that multi-family has done, by our other entities, has a very, very good track record and prior to the recent two plus year experience at Atlas, it was a good business at Atlas. And so there is a lot of multi-family business out there. We're not taking it on in Florida and Vegas and other places but there's a lot of multi-family business and typically you see this -- I mean, single-family free standing housing is down and people have got to live somewhere. They're going to rent or they're going to buy smaller places. They're in condos. So we're not abandoning that sector and we can do well and have done well in that sector before.

Bill, do you want to add to that?

I would say offices were weak for years and they're finally coming back just a little bit. We're seeing more office construction. Lodging roared the last year or two, although it's only 1% or 2% of our business so it's not -- it was a, the year over year increases were amazing. That leveled out but leveled out at much higher levels than it experienced for years after 9/11.

Manufacturing is strong. I think the weak dollar has helped manufacturing and we've had some very good manufacturing projects. Education I think is particularly strong in the areas of the U.S. where people are still immigrating, the areas people are still immigrating to, which happen to be the areas we're the strongest in, the southeast. And so I would agree with what Bill said. The very high levels of healthcare, they're at historically very high levels but that has leveled. The year over year percentage growth is not there the way it was for three or four years but everybody, all the prognosticators think that's going to stay very strong because of the demographics of the aging Baby Boomers.

Right, thank you.

And your next question comes from Justin Maurer of Lord Abbett. Please proceed.

Good morning guys.

Good morning.

Not to beat this backlog horse anymore but just so I understand on the -- you guys talked a lot about the Atlas revs, how much you have to roll off because of the backlog coming down but I think you've said in the past that that tended to be longer tail business meaning that the backlog that you have today in theory should turn a little quicker and I guess the reason I ask is it just seems to me given the size of the backlog that despite having some of the dampening effect of Atlas being down lingering into middle part of next year that you should be able to more than offset that through the size of the backlog today. Is that fair?

Definitely, definitely expect that the revenue increases will have, the non-Atlas entities will more than offset the revenue decrease that we'll see at Atlas.

Okay, so we shouldn't expect to see a similar quarter like this past one where the overall revs were down slightly because of the drag that created.

I think that was just -- it happened but it might not have happened. It's just the way different things hit.

I think that's obviously why people were surprised this morning, some of it having to do with the earnings maybe but I think the explanation just kind of --

We knew they would be. Luckily we had our share purchase program in place and it bought some shares.

There you go, okay. Thanks guys.

Once again ladies and gentlemen if you do wish to ask an audio question please press * followed by 1.

And your next question is a follow up question from Mr. David Yuschak of SMH Capital. Please proceed.

Hello.

Hi David.

Just a quick one on -- you know, you guys have been starting small on your acquisitions and I'm assuming thinking big on the success you've had down there in Tucson this year. Could you give us a sense that this other acquisition again is kind of a smallish one? And you've also done these little seedling new offices as well. Could you give us a sense as to some of the things that you need, like in Tucson, to continue to make that thing become bigger and are those some of the blueprints you're going to see happening in your Tacoma operation? And then just give us a sense as to the success you've had in some of these new offices.

Each ship floats on its own bottom, what you're talking about -- Tucson, Tacoma, Charlotte's new office. They are all potentially growers. Many of these private operations are, they get to a certain size and they don't grow very much because it take some additional energy and capital and I think we can help with that a lot and we're choosing companies here that have the basis for growth and are in markets where it is not always just a struggle for market share gain.

On the other hand Dave, we are looking at other larger entities, a number of them. It just so happens that these we closed early, the smaller ones but the average size of what you can expect us to be looking at is almost twice what these entities are. That's the average size. So you know, we're not always going to start this small. It's a market oriented and availability and quality equation that's got a lot of pieces to it.

Could you maybe just -- on the Tucson acquisition, you said it's been performing much better than expected. Could you give us a sense as to just how much better they are and what things they have been doing to gain that kind of traction?

I don't want to go into specifics because we don't, apart from Atlas, give much individual company information but when we acquired them we said that if they had been a part of us last year they would have given us $1 million to $1.2 million of EBITDA. They've given us substantially more than that. It's been more their earnings as opposed to their revenues. Their revenues haven't really gone up the way their earnings have but you know, a very nice fraction larger than what they had done last year.

Appreciate it.

Thanks Dave.

Your next question is a follow up question from Susan McGarry of Granahan. Please proceed.

Hi, I just want to make sure that I'm clear about your comments about overall backlogs. So we should not be surprised if backlog stays at the current level or even declines slightly in the next two to three quarters?

If I had to take the over/under on this number for the next quarter I'd probably take the over but it wouldn't surprise me at all if it was under. It's -- backlog is a very lumpy thing for us so I do think -- our backlog I think will go up just with general growth of the Company over time but you're not going to see, I don't necessarily think that you're going to see the giant leap that you just saw and actually, average project size has been coming down so it's true that we'll be burning backlog a little more quickly. Nevertheless, I think everything in our pipeline suggests that that backlog can be replaced, frankly, very easily. Frankly, we'll turn away work for the foreseeable of anything that we can see or measure.

Alright, thanks.

Alright.

This concludes today's question and answer session. Mr. Murdy, please proceed to closing remarks.

Thank you Christy and thank all of you for being on the call. We'll see you on the call three months from now. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.