Comfort Systems USA Inc (FIX) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 Comfort Systems USA earnings conference call. My name is Chanel and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). 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 call, Mr. Bill George, Chief Financial Officer. Please proceed, sir.

Good morning, everyone. Welcome to Comfort Systems USA's third-quarter earnings call. 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 as well as in our press release covering these earnings. On our call with me this morning are Bill Murdy, Comfort Systems USA's CEO, and Tom Tanner, our Chief Operating Officer. Bill Murdy will open up with remarks.

Thanks, Bill. We are very pleased this morning to be announcing the best third quarter in Comfort's history with a net income of $0.34 a share versus $0.28 a share in the corresponding quarter of last year. Revenues for this quarter including our recent acquisitions were up 22% from the quarter last year and on a same-store basis were up 8% and this of course includes the deliberate reduction in Atlas revenues which we've talked about before.

Our cash flow remains exceptionally strong at almost $18 million for the quarter and we ended the quarter with more than $100 million in cash on the balance sheet. Backlog at 30 September was overall over $800 million and, although it was down slightly on a sequential basis on a same-store calculation, that again gives effect to the reduction in the Atlas work.

Our bottom line, which shows a 21% increase over the third quarter of last year, is really a tribute to the efforts of our teams across the country. Our work at improving our processes and our procedures, which ultimately enhance productivity, all of this shows continuing very good results.

For the nine months ending the 30 September net income showed an improvement to 60% over the first nine months of 2007 at $0.92 a share versus $0.57 a share. Improvements at Atlas of course helped in this regard. Our revenues for the first nine months of 2008 came in just short of $1 billion.

I'd like to conclude my brief opening remarks here or by saying that we believe we can continue our strong performance into what is at least an uncertain path forward here for the economy. We've demonstrated a track record of business getting, of expense control and certainly cash discipline and we believe we have in place the fundamental elements of efficient execution.

Further, we are in a good essential business and we're situated well within that business, solidly in this large and growing midrange of HVAC mechanical construction and service. Our focus on retrofit opportunities, repair services and our very important emphasis on energy efficiency driven work we believe will enhance our success moving forward.

Further, our strong balance sheet will allow us to capitalize on opportunities as they arise. And candidly, we see no reason to not continue prudent acquisitions, not that -- we're going to continue our cash dividend and our stock buyback programs. At this time I'd like to turn over the mic to Bill to further elaborate on some details and then Tom will make some important operations comments.

Thanks, Bill. Let me just take a minute or two, add a few details that many of you will find useful. The first item that I want to update is our progress and accruals at Atlas. We feel that Atlas is on track with its recovery plan. For the quarter Atlas' operations lost approximately $1.3 million with those losses arising from the ongoing closeout of our operations in Florida. The continuing portion of Atlas was profitable, but, as expected, it is smaller with a backlog of approximately $62 million which is $40 million less than one year ago.

Also, you may recall that at the end of 2007 Atlas had a total of $6.2 million in accruals relating to claims and contingencies on certain of its legacy jobs. As of the end of the third quarter that overall accrual stood at $3.2 million and the new team at Atlas has resolved approximately two thirds of those projects including all of the projects in the mid-Atlantic and Californian markets.

Today the outcomes on complete projects were within expected parameters with the exception of an additional receivable accrual of approximately $500,000 on a job where the owner has recently entered into bankruptcy. It remains our best judgment that these accruals are sufficient in light of the remaining risks, even though we expect to vigorously contest many of these matters.

Positive free cash flow was a remarkable $17.7 million this quarter which is $3.6 million higher than the third quarter of last year. Through nine months we have had $36.8 million of free cash flow which is twice our total free cash flow at this time last year. Cash balances remain strong at $102 million and we have another $10 million in near cash assets and these totals are in spite of our continued expenditures on acquisitions, our dividend and our regular stock repurchases.

Our effective tax rate for the quarter was about 1% lower than our ongoing full-year estimate due to some discrete items. However, because of rounding the change did not actually affect our quarterly EPS number. We continue to expect the full-year tax rate to be between 38% and 40%.

Our balance sheet remains rock solid. We have strong cash balances and nominal debt and our unused credit lines are prudently structured and do not expire until 2012. As we survey our markets we have intensified our efforts to maintain disciplined cost structures and to act proactively to adjust rapidly and efficiently to changes in our individual markets. Nevertheless where prudent we continue to deploy our balance sheet strength into our operations, for example by investing in modern or improved physical plant and technological resources.

Our stock repurchase program has continued to return money to our shareholders. So far in 2008 we've purchased 1.6 million of our outstanding shares and returned $19.5 million in cash to our shareholders through this program. Since we began buying shares about a year and a half ago we've purchased 2.5 million shares and returned over $30 million to our shareholders.

Quite an interesting morning. I do not know where our stock price is at the moment, but a short while ago our market cap was in the $285 million to $300 million range. After subtracting cash and near cash that means our underlying enterprise is being valued at about $180 million to $190 million, and that's an amount that is about two times our trailing 12 month EBITDA; it's also about two times our trailing 12 months free cash flow.

We do not know what the future holds; however, Comfort Systems is a remarkable solid company that is growing in fundamental long-term value and we're convinced that our stock buyback is a source of solid value for our shareholders. Our reputation and balance sheet will make a big difference for us as we confront the coming quarters and we're certainly optimistic that we will be able to continue to make good investments including, as I said, our own stock.

That being said, it's the quality and commitment of our workforce that is the real key to the confidence that everybody here feels. That's all I have on financials, so now I'll introduce Tom, our Chief Operating Officer. Tom?

Thanks, Bill. Good morning, everyone. We are certainly pleased to have achieved the best third-quarter results in our history. We would certainly like to thank each team member for the great job they are doing. Their hard work, dedication and commitment will always be the foundation of our ongoing success. Even as we move into potentially very difficult economic conditions, we are confident of our future long-term success because of the quality of our team members.

As in the first half of this year the great majority of our companies performed very well this quarter. Our continuing focus on improved execution in both our construction and service divisions continues to be a large part of the improvement in our operating results.

Bill previously reviewed the status of Atlas. The two large legacy projects in the [Tempe] area suffered cost overruns this quarter primarily because of decreased labor productivity and re-work as the projects are coming to an end and the employees come to realize that they will soon be out of jobs. However, the loss for this quarter should not overshadow the significant improvement in the remaining operations based in Texas and the Northern Virginia, Washington, DC areas. Both operations have been modestly profitable all year and both divisions are poised to have positive 2009 results.

To further reduce our risks going forward, the Atlas Northern Virginia Washington, DC group is being merged into Hess Mechanical, our very strong mid-Atlantic-based construction operation. The Atlas Group brings to Hess a much improved operations team and a very solid backlog for 2009. Hess will provide additional support in the areas of estimating, labor-management, purchasing and pre-fabrication.

The combined group will be able to reduce their overall overhead cost which is especially important in the current economic environment. Our current view is that Atlas will be moderately profitable in the fourth quarter and then the remaining Texas group, expected to have revenue in the $25 million to $30 million range in 2009, will be solidly profitable next year.

As we move into these very uncertain times our operations will continue to focus and emphasize the basic foundations of our business which includes project selection, estimating, project pricing and project execution. By reinforcing these disciplines we will be able to maintain our current momentum and be able to profitably move through whatever the future holds.

Even in a downturn we will invest in our people and our facilities where required to continue to improve our operations, to be better prepared for the current conditions, and to be ready to take advantage of the opportunities that will present themselves when the economy begins to improve.

Our continuing focus on the service and the energy service segments of our business will certainly help us to maintain our profitability in the downturn. We will be helped by lower commodity prices and significantly lower price of gasoline assuming that prices stay in their current range.

At both the corporate level and at our operating company level we have already started to cut many of our discretionary costs for the balance of 2008 and for all of 2009. Our extremely experienced management teams have made the necessary cost reductions in past downturns and they will continue to use that expertise to effectively manage their operations in the current downturn.

We will be extremely diligent about cutting costs where identified. Many of those cost cuts will become apparent as corporate and our operating companies complete the budgeting process for 2009. But even as we recognize that the future will be challenging, the majority of our companies have a very strong backlog.

We continue to book new work and there are still good project opportunities that we are pursuing in the great majority of our markets. Our backlog is up sequentially to a near record of $805 million; our balance sheet is extremely strong.

In difficult economic times our strengths will definitely help differentiate Comfort Systems from our competitors. These strengths will continue to help us attract the best people in our industry, to secure work that are weaker competitors can't perform, and to have acquisition opportunities for companies which are fundamentally sound but which are struggling because of the current economy.

While acknowledging that the economy is certainly weakening, we are confident of our future. Our operating companies have the best management teams in our industry that are extremely capable of successfully managing their companies through the downturn. Then our companies will be even better prepared to take advantage of the next upturn.

In closing I again want to thank all of our team members for the great job they are doing. Because of their efforts we have earned respectably record results for each of the first three quarters of 2008 and we expect a strong finish in the fourth quarter. With that I will turn it back to Bill.

Thanks, Tom and Bill. I think we ought to open it for questions at this point if there are any.

(Operator Instructions). Matt Duncan, Stephens Inc.

Good morning, guys. This is Jack Atkins on the call for Matt. I was wondering, first of all, if you could comment on how the tough credit environment has impacted bid activity so far.

Maybe Bill and I both can comment on that. We don't have perfect knowledge on this, Jack. We have seen and heard about certain projects being delayed and/or canceled based on financing. I think Tom, we've had one project canceled and we've already accounted for that in backlog. So we're not seeing it across the board. Where you're going to see it is in some places where we are not located -- I think South Florida, Southern California, possibly Phoenix, possibly and certainly Vegas. And we don't have a big presence -- we don't have any presence in construction outside of schools in Vegas.

So we're just not seeing it broadly yet. We hear more about it, we read about it. We hear the rumors; we listen to the bobbling heads on CNBC like everybody else. But we don't have true evidence of it. There are all kinds of stories about things. One major developer in Houston has just decided not to go forward with a high-rise condo here in the west Houston area and we are not sure if that is financing or market conditions or what.

Okay, great. Thank you for that color. You said you had one project from your backlog that was canceled. Do you feel confident about the remaining projects in there? Have you taken a look at it as far as any other projects that may be at risk?

Given the current times we are very diligent about what we put into our backlog, so we have certainly looked at our backlog, especially at the end of the quarter, to see where it stands. We're comfortable that what's in the backlog today will move forward, but by the same token there's no basis for saying that some project unexpectedly won't get canceled and we believe that's going to happen. We don't think that in our existing backlog of $800 million there's a lot of opportunities for that, but we would be foolish not to think that there would be some minor cancellations going forward.

Okay. Can you talk a little bit about what types of projects are still showing good growth prospects and what type are seeing maybe some deterioration of bid activity?

We are seeing continuing activity and strength in the healthcare sector, in schools, in a lot of military work post camp and station work going forward. There is a lot of high rise opportunity out there. It has shifted from condo to for rent apartments, I'll say that. We don't have a very good view into the hotel sector right now. I think that might be weakness -- there may be weakness out there, but we don't have a huge presence in that area anyway. Tom, do you have any --?

Certainly office buildings which we don't have a huge presence in and if there's a market where we would be concerned about project cancellations or significant delays it would be at the high-rise multi-family business that Bill mentioned and that's typically a function of, number one, financing; and two, demand. But that's one of the reasons that we have deliberately reduced our backlog at Atlas over $40 million to a very solid 60 million going forward which we're comfortable with the opportunities that we have there that that backlog is a solid backlog.

You said your Atlas backlog was $62 million. Does that incorporate all your multifamily work in backlog and could you maybe tell us how much of your backlog is multi-family work?

The $62 million at Atlas is all multi-family increasingly for rent. We have a very modest amount at this point of additional multi-family in our other organizations I think less than half of what you see at Atlas, the last time we had a round of financial calls -- and I will say a lot of that work is very long in the tooth.

Quite frankly, you have to remember, when you're talking about our backlog, 85% of it is work that's left to complete on projects that are already started. So there's still backlog for things that -- there are still closeout projects in Florida for Atlas that still represent a little bit in our backlog.

So that's an important -- the backlog statistic is a very important statistic because it's the only forward-looking statistic we give, but it really is not a prospect list let's say. It's more of -- an awful lot of it is work in progress and what's not there, something has to have been signed. So that's not to say it can't cancel, but it's not necessarily what you'd think of in a lot of industries when you were scratching your head about backlog.

Okay. And then one last thing and I'll jump back in queue. Could you maybe talk a little bit about the type of margins you're seeing as far as the new projects that you're booking for backlog, are they similar to the ones that are in there now or better or worse?

We've seen some margin diminution, there's no doubt. We haven't seen it broadly yet in certain submarkets that are more competitive, i.e. more people bidding for the same amount of work. One of the responses to this in our system is that the average project size that we're doing is going down. We have almost 4,800 projects going on and that's up 300, 400, 500 from where we've been over the last quarter end and consequently the average project size is coming down a little. And that's -- one of the strengths of Comfort Systems is the breadth of our operations across an awful lot of markets and the ability to do these smaller and moderate sized projects.

Great, guys. Thanks for the color.

Rich Wesolowski, Sidoti & Co.

Thanks a lot. Good morning. Can you guys --?

That's a close approximation of your name, Rich, right?

It was pretty close. I've gotten much worse, as many of us have. Can you review why you would expect the operating margins -- looking broadly not just '09 but during the down cycle to stay above that low average posted during the prior downturn earlier this decade, perhaps separating the market factors that are different from the last time around and also company specific factors?

I'll comment on the company specific factors for sure. We are a much stronger, much more productive organization across the board at this point. The work we have done in changing and improving processes and procedures, controls and training, etc., I think are strengths that reside now in the Company across the board and I think we can fully utilize those.

Are there going to be pressures on margins? Yes. And there's also another positive thing here and that's commodity prices have decreased. We buy a lot of gasoline; we buy a lot of steel pipe, copper, PVC. While those commodity materials -- I'm not talking about gasoline now, but while those commodity materials are not a huge percentage of our operating cost, they're significant and then we've seen some positive instances there.

Are those things positive enough on their own to keep the volume of commercial work up at the high levels of the past? We don't know for sure and probably not. But I think we go into this much stronger, not to make short of the fact we have a much stronger balance sheet than we did going into the '02-'03 period which you may recall. So I think those are the Company specific things. Bill, do you want to --.

Another just mathematical change is, there were companies during that time period contributing -- and you're not supposed to use this word very often, but what would be extraordinary losses because, remember, we had just bought 110 companies in about 30 months and the world had moved pretty significantly around us and we were in a survival mode.

During that time period we went from 110 P&L to about 40 of those P&Ls that are left today. And quite frankly, we lost a lot of money at Stanford, in Iowa, in Georgia, and the Carolinas, we were losing money, closing things down, adjusting things. And some of that is not reflected in our numbers because the operations were ultimately discontinued, but some of the best operations we have today are still a part of Comfort Systems continued in some ways so that those numbers haven't been taken out of our historical results.

And frankly, we're not a survival risk right now and we're not a company -- we think our operations are frankly the best in the industry, the best this industry has ever seen as opposed to then when we were really struggling to get our feet under us.

Given all of that, which makes a lot of sense, are you willing to venture a range of what you would consider respectable operating margin in a recessionary environment?

The question is are we willing to give you a range --?

It sounds like the lows are higher than they used to be and I'm just trying to get a sense of what the risk is to operating margin over the next couple of years?

I don't think we are going to give you a range, but let me give you a fact. The fact is that the way that we've structured our President's incentive plan for the 45 people who run our existing and our newly acquired companies they don't get a penny of bonus unless at the operating level they make 4%. And let me tell you something, these guys, they plan to do well; they plan to continue to make money.

I believe if you looked back historically at those terrible times when we had these calls, we would talk about geographies that were struggling but we also had many, many geographies that did well. Many of the geographies that did well were smaller markets such as Little Rock, Arkansas or Grand Rapids, Michigan or even smaller cities that frankly they don't necessarily in my opinion see the same highs and lows that you might see in giant metropolises.

In fact if you look at our year-over-year decline in backlog, if you take out our three largest project companies, two of which are in the two largest cities we operate in, if you back those out we're actually up. So the loss is more than accounted for at three of our largest project companies.

So I don't know, I think that what you're going to see is you're going to see a mixed bag. You are going to seen different peoples struggle, different people do well, but I think this is a good company and good companies -- they make money and downturns.

Okay, thank you, Bill George. That was very helpful. And then lastly -- and this is a smaller matter -- just trying to understand the Atlas claim backlog and how you recognized a loss on those former projects and still had contingency left. Is the contingency a sign to specific projects and it's not an aggregate number?

That's exactly right. There were 11 main projects that had to be closed out in those three geographies. Each one had a discrete accrual which had a discrete set of factual assumptions and explanations that we went over with our external accountants and each one of them is treated separately. And whenever we've closed out those projects, frankly, the majority of the ones that we closed out had modest pickups but those pickups have tended to be, for one reason or another, reallocated to the remaining projects. But at the end of the day, yes, it's a very granular conversation.

So just because you recognize this loss doesn't mean another project won't come back to help you in a quarter or two from now, whenever it is?

We plan to contest these matters vigorously and some of that money we really, really believe we're owed.

Great. Thank you.

David Yuschak, SMH.

I've got a bit of a problem here as you guys are talking about a company that has a lot of potential here, and even in a difficult environment. Yet the enterprise value on a share base suggests that you're getting closer to liquidation value than you are sustaining.

So the question I have to ask you is as you look at, and as you talked about the acquisition opportunities, based off of just our forecast alone the value of this company today on an enterprise value is 2.5 times enterprise value to EBITDA. Acquisitions versus share buyback, it would seem to me your best bet right now is, given there may be reluctance on the part of owners to sell, to be a major share buyback opportunity here more than it is looking at acquisitions. Give me a sense as to either/or or both?

We agree that the share buyback opportunity is quite attractive on a mathematical basis. The market is acting, in my humble view, entirely irrational. There is an undue lack of exuberance and the share price doesn't stay where it is I don't think. But we're very careful about acquisitions.

Acquisitions for us are not just opportunities to go out and create, they do create earnings, yes, but they're not just that. We're making strategic acquisitions. We're making acquisitions in areas where we are not currently located that demonstrate future growth, future vitality, where we can be a major nonunion player. So there are a lot of strategic aspects to that.

At the same time we're not going to overpay for strategic activities. We have a penchant for current accretive value and we can turn on and off our acquisition activity easily as we can our stock buyback. We've consistently demonstrated that we're interested in buying our stock. I don't know if that helps you with that.

I'm just kind of curious though. Given it's 2.5 to 3 times enterprise value to EBITDA right now, does that present a dilemma as far as going to owners and talking price with them?

If we were to stay at these kinds of multiples it would be very, very hard mathematically to make an argument for doing anything but buying our stock. One thing, our stock buyback program utilizes a matrix where when the stock dips we go get shares, we get a share of what the market is trading. But if you look over time at our stock flows and our weighted average prices, it's not as if you can go buy millions of shares at the low end of the range, you just have to be in the market every day with a rational program that makes sure that you get a share.

That said, if we were to see a prolonged period of trading at a couple times enterprise value to EBITDA, I think we would be prepared to buy quite a handsome amount of stock. And one indicator of that is the fact that we bought 0.5 million shares since the last time we all talked.

Our matrix, because we've traded slowly over that period, traded lower and lower, our matrix has continued to get more and more shares. Most of those shares, frankly, in the last two or three weeks when the stock got really low. And so I think you just do what you can in that area. You measure what you do, but you make sure that if you have this kind of a value and you really believe in the Company and you have as much cash as we have it's pretty hard not to engage in that activity.

Let's just talk about the quality of the receivables at this point in time too. Any issues there as far as needing to take some additional charges or how well have you scrubbed those?

In a word, no. Well, we scrubbed them well. In a word, no, we don't think we have to take much in the way of additional charges. Keep in mind that for all of our project work we get liens on the property. And since there's still the land value and other things involved, so far the values of property haven't fallen so low that people are abandoning them.

So we tend to collect all of our money on construction work. Now we do have some circumstances from time to time where there will be structural issues. In fact, in this quarter people who are looking closely will note that we have increased our bad debt reserves. A good chunk of that increase was simply we believed it was prudent to increase those reserves for our service operations where we don't get those liens, particularly for the 15% of our revenues that's pure, pure callout service.

But at the end of the day, one of the nice things about this industry is you get a lien on whatever you do that comes ahead of everybody but the IRS. That is very helpful for us.

One last question and I'll get in the queue. As far as you review your operations today in looking at the various markets, is there anything in your markets right now that kind of stands out as far as whether it's you or somebody else in that marketplace starting to see some substantial signs of this so-called black hole that seems to be out there that everybody seems to be talking about and expecting? Are there any markets there that show you any indication that that's in fact beginning to surface?

I certainly wouldn't characterize it as a black hole.

Yes, but the market is.

I think the areas of the country that have been particularly frothy, and I mentioned them before -- San Diego, Las Vegas, Phoenix, Miami -- two markets that we're not in in that list, certainly would be the candidates for that. On the other hand, the world is not coming to an end here. I think there are some temporal dislocations in front of us in certain markets, but I don't think so, Dave.

This is not a meltdown for us specifically and anyone in general. This comes back and I think what is happening now is just the fear of the unknown here; people are safe siding everything they're doing and that's just as irrational as the other kind of positive exuberance that might have existed in the telecom datacom room of the early century.

But I guess what I'm maybe kind of trying to come away from this with is from an operations point of view is there anybody in your operations -- because you're showing some darn good numbers, excellent gross margins and is there any of the operations right now that's kind of beginning to show that kind of drag that could suggest that there could be some problems in some segments of your markets?

Not on an historical basis, we haven't seen that yet.

Certainly not the kind of stuff you seem to be referring to. It seems as if -- we mentioned on the last call that we were seeing comparative weakness in Arizona, in California, in the upper Midwest in one or two locations, I think we mentioned Seattle -- and certainly that continues. But as far as the science-fiction theme of a black hole scenario, I would say that really the fear there is a year from now; two years from now will banks be leading to good projects?

We feel pretty good about that in part because only 35 of our 40 traditional markets are these smaller markets where the lending has usually been done by the local regional banks and they tend to hold the debt so they have a mixture of mortgages that are two years, five years, 10 years and 20 years into their amortization cycles. But at the end of the day, if financing stays shut down long enough things such start to get much, much more extreme. So I guess that's the only thing I can think of that might be responsive to what you're describing.

So I suppose longer-term there may be requirements on some of the owners to just put more equity in the deal than maybe traditionally has been the case in these regional markets?

And you know what's really interesting is usually going into a downturn we're overbuilt. In this case, if you look at vacancy rates in office buildings or lodging occupancy, they don't look bad compared to say 10-year averages. Normally, and it was certainly true in '01, it was definitely true in '91 and unbelievably true at the end of the '70s when we had the massive meltdowns in our industry. It's true in this case that those statistics don't look bad, the underlying statistics. So hopefully at some point good projects will start to get built.

Thanks a lot. Good points, appreciate it.

Clint Fendley, Davenport.

Thank you. Good morning, guys. I know Tom talked a bit about the discretionary cost that you've begun to cut here. I wonder, Bill George, if you could maybe discuss the levers that you might be able to pull both on a fixed as well as a variable basis as we go through 2009?

Quite honestly, the biggest variable lever, and it's massive really in our company and on a scale of our results, is incentive income. In this industry we pay very, very well in an expansionary time. Our $10 million of bonuses to the field just to the high-level people, those naturally go down and they go down quite substantially because they're growth incentives within our plans, so that's the biggest area that will ratchet back naturally.

You get past that and what you have to do is you have go and frankly you have to look at what you're doing on your general and administrative side. You have to make sure that you're getting maximum productivity, that you have the right number of people, that you keep the right people.

And then on the operational side, nobody shows up at -- the vast majority of our workforce doesn't show up at Comfort Systems USA addresses every day, they show up at job sites. And when jobs end it's not as if we bring 1,000 people into a 30,000 square foot building and have them stand around. That's just not a feature of the construction industry.

There are things that can be done at the margin, if you will. All of them have costs, all of them have benefits. I don't think we're doing anything today that we don't think has some benefit. But to safe side ourselves we have already decided to do certain SG&A direct cuts. We're going to mitigate the amount of training and education we do next year relying on the fact that we've done a lot to date and we've got a lot of people trained and we've got momentum in the system.

We're going to be canceling a number of our national meetings which again have efficacy, have benefit, but we believe we can operate on the momentum of meetings past. Candidly we're freezing senior management base pay for next year. All this is safe siding. We can always adjust those back up as is necessary or useful.

We're mindful of all these things and are I think being very prudent and I think in each of our individual operations they are as well. And I think these -- remember, at the end of the day we are in, as Bill said, in a lot of project work which can -- where those workforces are variable.

When you look back to the previous downturn are you entering the end of this cycle with a much bigger backlog than you had back at that time?

About twice.

It's remarkable. In fact, close to half of our companies today still have record backlog. And people who have followed it, and there are many people on this call who've known us for years, they will recall when $300 million was a really huge number for us to be reporting in backlog. And then we were two thirds the size we are now or more. So there is a size differential there, but it really is a different starting point.

Okay. And then final question. When I look at the cash flow statement, there was a bit of a spike here, a notable one within the bad debt expense. Is that related to the Atlas work?

Mainly that's related to (technical difficulty) more money really prescriptively, much, much more money than was indicated by numbers, but frankly what we thought was prudent. On the service work just because frankly we had a great quarter and that seemed like a prudent thing to do. Also there was one project where there were sort of -- there's a very complicated ownership structure, it's in Florida and there is a bankruptcy.

And although we believe our liens are good we thought it was prudent to classify some contingency that we had set aside in that job for those issues as bad debt and bad debt runs -- by the way, bad debt runs through SG&A as well. So you would have seen SG&A improvement this quarter but for the incremental additions to bad debt.

It was about just under $1.6 million if I'm not mistaken on the cash flow, is that correct?

I don't know that the incremental amount -- the accrual is bigger than that. I think the incremental amounts are somewhat less than that. But if I get better information before the end of the call I'll come back to that.

Okay. Thanks, guys.

Tahira Afzal, KeyBanc.

Good afternoon, gentlemen. In terms of your cost structure or your -- if you look at your personnel, your benefits and your G&A structure on the institutional side of your business, so let's say healthcare, education and government, you seem to be holding up pretty well. And you compare to that of your private, commercial and multi-family oriented cost structures, are there any differences between the two?

Really we use a lot of the same resources to do either type of work and we don't manage our work or segment it from an operational viewpoint by customer type. And so really a majority of our companies do that kind of work and they also do commercial work and they are using really the same back office for both.

And then if I look back past both 2001 -- and I know those were abnormal circumstances for you and the Company has materially changed since then. But even if I look back then, you were materially able to get your G&A down -- let's say even on a year-on-year basis you were able to trim it by around $20 million plus year-over-year. If you look into 2009 and the levers you have to push and pull, what kind of trimming could you potentially get down to let's say if you have flat to let's say 5% declining revenues? Is there any sense that they would be down around that?

I would say that some of that $20 million reduction related to companies actually being closed and the entire staff being laid off. I certainly don't foresee that happening anywhere. So I would say that -- I certainly wouldn't be willing to commit to like a $20 million number. That said, we'll get a third of the way towards that. Frankly if things get really slow we'll get more than a third of the way towards that just on the natural decrease in incentive compensation.

And we think that there are very -- obviously that would entail a great decrease in revenues and obviously that would change the overhead that would be needed related to that. We're also very actively -- over a long period of time if you look at our company and you see what happens with the number of P&L's, you'll see that even though at any given time there is not a very perceptible difference, over a period of time we're making a lot of progress in sort of combining operations, standardizing things and trying to get the economies of scale that way.

You've done a great job of doing that in the prior cycle and I guess I was just trying to get an idea of how I could segregate what was to do with the consolidation and divestment of units and what was above and beyond that that you could see coming through in this cycle again?

I guess the other question I had was on state and local, we keep hearing negative headlines there. Do you have any concerns? I know that most of the CapEx that comes through state and local is budgeted differently and hence do you see any sensitivity to what we're hearing right now to some of the pipeline that you are seeing?

We have not seen -- we read the same thing as you do about offerings. If you're talking about schools as part of that, it's holding up well. Education today is -- 17% of our revenues come in that sector, it's holding up quite well. I think there is the recognition that if we intend to improve our education system it's got to start with the capital that's invested in the buildings and facilities and that continues.

And Bill, that's actually a good lead into my next question. As both of you look carefully at the elections coming up and who knows which way it will go for sure, but let's assume Obama comes in. He's been talking a lot about energy efficiency and then, of course, a fiscal stimulus related to social infrastructure. As you look back in your experience, if you do think there will be a fiscal stimulus coming in do you think it will play out with a concerted lag? And would there be some air pocket in between, something beneficial coming your way and the weakness in the economy that you're seeing right now?

Well, with respect, I think both candidates are talking about energy efficiency and all kinds of programs that relate to that, this is longer term in nature. But we have already started in the energy efficiency area and it's going to stand us in good stead going forward. Regardless of the slight current dip in crude oil prices which does have an effect on overall energy prices, our customers' end users are quite interested in energy efficiency.

And when they look at their facility and 40% of the electrical power consumption is based on their HVAC system, they see ways to save substantially by having those HVAC systems well-designed and well serviced and maintained. So we're already started there. I think this is something that happens almost regardless of the administration. There may be some boost by virtue of an Obama administration if there is one, but I don't think that would be significantly different to us.

Got it. And I guess my last question is people do look at your company and, as you've pointed out, the valuation is exceptionally compelling. Let's assume that private equity, for example, does have the cash let's say to do -- look in the space and do LBOs with companies of a profile similar to yours, what would be the challenges of doing an LBO type of a transaction?

Well, you know, the main challenge would be the need for bonding. You would have to have a pretty special private equity interest that would be willing to put in the kind of cash they would have to put in to result in a balance sheet that was not very levered. You might lever up one or two times enterprise value to EBITDA.

And by the way, you could go two or three times but you better be thinking about trough EBITDA, not peak EBITDA, when you're doing that. That leaves those companies putting in so much cash that they have to make heroic assumptions about the future in order to get the kind of rates of returns that they would typically get. That said, I would've said never before our stock price got to this level. This is an amazing set of valuations and it's not just Comfort Systems.

That's not to say that we would even entertain a private equity offer at anything near these levels in our stocks. Candidly, maybe there are some of our Board members on the call, we wouldn't even take it to the Board.

There might be interest, but it would be one-sided.

So would you say that there's more likelihood of -- in the electrical mechanical contractor space more likelihood of M&A and consolidation as we saw to a great extent in the last cycle versus LBO type of transactions?

Certainly that's a possibility. It's happened before. Remember, this is a highly fragmented and principally private area here and we believe, on the other side of that, that there are lots of opportunities for expansion by bringing in some very good currently private enterprises into Comfort Systems.

Great. Thank you very much.

John Rogers, D.A. Davidson.

Good morning, guys. This is Tristan Richardson for John Rogers. Just a quick question about your prospect list and the list of projects that you target. How far out do you guys typically look? Are you looking at projects that are going to come out 12 months from now or nine months, how far out do you see?

To get any visibility we would be talking to local engineers and architects in our respective marketplaces to see how busy they are and what's on their drawing boards that they're working on. So in today's environment those are the places that we're looking. And in some markets we're seeing work diminished and in other markets we're seeing work -- the engineers and architects are still very busy. So it is a mixed bag across the country today. Nothing more than 12 months. A typical project that we're doing can get designed in six to nine months, so we don't get great visibility beyond that.

Okay. And so on the whole would you say that that hasn't changed from -- if you were to look at your targeted list a year ago?

I would say that in some markets such as the ones that Bill mentioned -- Phoenix, San Diego -- we're seeing less opportunities. In other markets, and we look at this information weekly in conversations with company presidents and our regional vice presidents, it's still amazing, the opportunities that are out there, the estimating staffs are still very, very busy in the great, great majority of our companies.

Okay, thank you guys very much.

Matt Duncan, Stephens Inc.

This is Jack again. Just one quick follow-up question. How much of the sequential decrease in same-store backlog was due to the working off of Atlas backlog?

Year-over-year it was $40 million.

Right. But on a sequential basis can you --?

$14 million within the quarter over quarter.

Okay, thanks a lot.

There are no further questions. I would now like to turn the call back over to management.

Thank you very much, everyone, for being on the call. We hope we have projected a reasonable amount of optimism actually, certainly optimism relating to our capability to deal with the uncertainty of the future here. So we thank you all and we'll see you in three months on this call and in between if desired. Thanks.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent weekend and Happy Halloween.