Comfort Systems USA Inc (FIX) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Comfort Systems USA earnings conference call. My name is Keisha and I will be your operator for today. At this time, all participants are in a listen only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. Bill George, Chief Financial Officer. Please proceed.

Thanks Keisha, and good morning, everyone. Welcome to Comfort Systems USA's second quarter earnings call. Our comments this morning as well as our press releases contain forward-looking statements within the meaning of the Private Securities Litigations 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 most recent annual report on Form 10-Q as well as in our press release covering these earnings. On the call with me this morning are Bill Murdy, Comfort Systems USA's CEO; and Brian Lane, our Chief Operating Officer. Bill Murdy will open our remarks.

Thanks, Bill. As everyone on the this call knows, after the market closed yesterday we announced an increase in our dividend from $0.18 to $0.20 per share per annum. That increase is witness to our continuing confidence in our ability to produce good results and cash flow in the future. Our cash resources, which end of the first quarter stood at $120 million, also allowed us to pursue acquisitions of private operations in our sector and to continue our stock buy-back program. Bill George will have more to say on that topic later.

We also released of course our Q2 results. Revenues are down from our records of Q2 2008, some because of planned reduction in multifamily new construction, but of course much more related to the slowdown in general economic activity and in nonresidential construction. Even so, with substantial belt tightening, economizing, discipline, and job productivity from a dedicated and expert workforce, we produced very reasonable net income, albeit again down from the records of Q2 2008.

Our backlog of projects is also down quarter-over-quarter, some again due to the purposeful reduction in multifamily, but most due to reduced economic activity. As Brian Lane will no doubt comment, we are booking new work, and there is a good quantity of work being bid and engineered. However, awards to us or anyone for that matter are slow, in some good part relating to available financing.

We are starting to see some stimulus work and have more in the prospect pipeline, but not enough to offset the general decline. While in aggregate our revenue, net income, backlog are down, it would be -- I shouldn't say it's down everywhere. There are a number of our locations and number in areas of the country where that is not the case where we have robust activity and noticeably large backlog -- that would be in places like Wisconsin, Florida, and Colorado. Further, almost 50% of our revenues and project backlog are in the healthcare, education, and government arenas, and that work appears to be continuing and we have a number of prospects in that area as well. At this point, I'd like to turn the mic over to Bill and Brian for some detailed comments.

Thanks, Bill. As Bill noted, we posted strong second quarter results in a challenging environment. Revenue decreased by $53 million in the quarter as compared to the second quarter of 2008 and same store revenues decreased by $73 million from a year earlier or 21% as acquisitions contributed an incremental $20 million in revenue. The planned decrease in multifamily activities was the single largest contributor to the year over year revenue decline, followed by a decline in activity levels in our Phoenix subsidiary. Also of note, for the first time ever, institutional work was the source more than half of our revenue in the second quarter.

Gross profit remained strong in the quarter, improving from 19.1% in the second quarter of 2008 to 19.4% this quarter. Operating income margins remained at favorable levels, coming in at 5.7% for the second quarter. These positive results are thanks to solid execution, including very strong results in Maryland and central Florida.

Since our last quarter, our backlog has decreased by $77 million or 10.7%. That comparison is a valid same store comparison. The year-over-year decrease in backlog was $138 million. On a same store basis, the year-over-year decline in backlog was $189 million, and that year-over-year decrease includes the intentional reduction in our large multifamily operations, which accounts for $65 million of that decline. Our backlog declines occurred disproportionately at our larger and more urban operating locations as we experienced weak bookings during the quarter. Even so, overall our backlog remains strong by historical standards.

SG&A expense decreased by $1.7 million or 4% as compared to the second quarter of 2008. As a percentage of revenues, SG&A increased due to our lower revenue base. If we exclude 2008 acquisitions and additional receivables allowances that we judged were prudent in light of market conditions, SG&A on an absolute dollar basis actually decreased by a little over 10% as compared to the second quarter of 2008. This decrease results from our efforts to maintain disciplined cost structures, and together with the effect of ongoing overhead reductions.

Our stock repurchase program continued this quarter and we purchased 400,000 shares. Since our program began less than two years ago, we have repurchased 3.9 million shares and returned a total of $43 million to our shareholders. As a result of these purchases, we have reclaimed shares equal to over 10% of our current share base. As Bill mentioned, in a separate press release we announced today, our board of directors increased our quarterly dividend rate by 11% to a per quarter rate of $0.05 per share. Notably, that modest increase in quarterly payout, which is an incremental $190,000 per quarter, is approximately offset by the reduction to our payout that has resulted from our share repurchases.

Our balance sheet remains rock solid. We continued our long record of producing cash for our shareholders, and we currently have $120 million in cash with nominal debt. Our unused credit lines are favorably priced, have borrower friendly covenants, and do not expire until 2012. We plan to continue to seek ways to prudently deploy our balance sheet strength into our operations and acquisitions as good opportunities arise. We remain convinced with a strong balance sheet and the best team of professionals in our industry, we can continue to improve our position in the mechanical contracting industry during 2009 and beyond.

That's all I have on financial, so I'll introduce Brian Lane, our Chief Operating Officer. Brian.

Thanks, Bill. Good morning everyone. Our strong results for the quarter are a direct result of the efforts of all our talented and dedicated team members. I would like to thank each of you. The great majority of our companies were very profitable during the quarter. Within our operations, both our construction and service divisions performed very well. Every day, we focus on the basics of our business, which includes project selection, estimating, project pricing, and project execution. Our construction groups performed very well this quarter and closed several projects.

We have increased the percentage of service work or work in existing buildings from prior periods. We provide our customers with solutions based on energy savings, we have added a service offering in certain geographic areas, and we are developing satellite service operations in geographic areas close to our existing operations.

Our energy efficiency offering is expanding. We are focusing on providing green building solutions to our customers as related to their HVAC system. Each of our companies have a lead accredited professional who is fully qualified to advise our customers on the long term benefits of having a sustainable building.

Our focus on safety continues to be a key strength of our company, and our OSHA recordable rate remains 53% below the industry average. This is outstanding.

The stimulus package has not yet significantly impacted our business. However, we are encouraged by a few recent project awards that were funded by the stimulus package, including for example the renovation to an Amtrak station in Delaware, and there appears to be other work in the pipeline, but not yet in backlog. We expect that developing weakness in the underlying environment for nonresidential activity will continue to negatively affect 2009 activity levels in our industry compared to 2008.

As we go forward, we have a number of challenges that we are addressing in a proactive way. We have developed and implemented contingency plans to minimize the potential negative effects of a continued downturn. Currently, our headcount is down 17% on a year on year basis and 3% sequentially. Additionally, our SG&A costs are down $2 million sequentially and we continue to monitor our costs to ensure that we have the appropriate level of SG&A in light of our revenue projections.

Our backlog, while still at solid levels by historical standards, has been declining. Backlog is at $640 million, which is down 11% sequentially. The decrease in the second quarter is primarily related to our DC, central Virginia, central Florida, and Arizona operations.

We continue our efforts to find the more active sectors in the market. Our pipeline remains very active, and we have had a number of good bookings in July, especially in the Southeast. We are seeing softness in the West, although our Denver based operation is strong and bookings are at record level. The Northeast continues to be stable. We continue to see pricing pressure as local and regional competitors respond to challenging conditions.

All this said, I am confident that we will continue to acquire more than our fair share of upcoming work. Based on our backlog and the weakening economic conditions for our industry, we expect lower profitability in 2009 than the record we achieved in 2008. We remain committed to execution, cash discipline, and cost control. Again, I would like to thank all of our almost 6,000 team members for a great first half of 2009.

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

Thanks Brian. Our focus here continues on current operations, and generally we believe we are well positioned to take advantage of available work and easily capable of increased activity when economic activity turns back up. We run a danger here of being too negative, but we want to be realistic about all this as we move forward and plan the use of our resources. We are also, as mentioned, very interested in growing by prudent acquisition, and at this point believe there is some very good opportunity in front of us.

So I would like to turn it over to the moderator here to conduct a question-and-answer period.

(Operator Instructions). Your first question comes from the line of Clint Fendley with Davenport. Please proceed.

Good morning, Bill, Bill, and Brian.

Good morning.

Good morning.

I'm hearing of the very few stimulus dollars that have been spent to date, most of it has been union related. I wonder as you look at the pipeline, how much of that has been earmarked do you think for union related work?

I don't think any of us really know the answer to that. I would challenge the premise. I've had some discussions in Washington with for instance the military people, and the naval facilities command, the Corps of Engineers -- they certainly are not focused on how -- what workforces are out there, and they are making decisions on job awards. I don't know. It certainly could move that way. If the stimulus money goes to very large projects, that's where the union forces are generally employed. If it goes to horizontal construction, highways, roads, bridges, et cetera, that is more the province of contractors. We don't know the answer to that question really.

One important thing to think about is that is what the geography that is involved. There are geographies that are highly union. There are geographies where none of the work, virtually no work is done by a union. And so a decision that only unions can do the work in some cases would be a decision that a lot of states in the Southeast don't get any work. That is going to be the biggest concern for us in markets where we overlap with lots of union activity.

Okay. Thank you. That's helpful. And I wonder when you look at the sectors such as healthcare, education, and government, where you are seeing the most activity. Are you seeing a big divergence in the pricing in those verticals relative to some of your other sectors? Are you getting better pricing there than the others currently?

I would say my sense of it is the pricing is under equal pressure everywhere. There is a small volume of work. There are a larger number of contractors because of contractors trying to move up from the residential business in our sector. Certainly there's margin pressure and compression. I don't think -- I haven't seen it relate to one sector or another more than other.

Okay. Great. Thank you, guys.

Your next question comes from the line of John Rogers with D.A. Davidson. Please proceed.

Hi. Good morning.

Good morning.

Hi.

I just want to follow up a little bit on the margin issues. You have great margins, I think, in the quarter given the decline in revenue levels. And could you talk a little bit more about what you are seeing in the industry? Do you think it's unusual for you relative to your peers? Do you have some scale advantages that you are taking on? And then, Bill, I get from your comments that you expect margins to come down going forward. And I guess do you see pricing deteriorating on the work you are booking now? Is that what leads to that or just normal cyclical turn?

I think net net, yes. It's a matter of supply/demand, competition, the general contractors, the end users know that material costs are down generally, although copper has creeped back up here and aluminum is back up slightly. I think we are going to see margin compression. What we are trying to work toward is maintaining a reasonable margin. As you know, John, a couple of years ago, we were quite happy with 4% operating margin.

Right.

And we achieved 6%, over 6% last year and this quarter last year we were at 7% operating margin. Unrealistically high levels probably, and what we are trying to make sure is that we maintain an operating margin level -- and what that relates to is gross margins. We have to keep those up in order to provide us some free board for the inevitable changes and problems that occur in construction. So there are going to be problems. And because of our relationships and our reputation, we are getting a lot of last looks at jobs, and that can be dangerous if we get the last look and we can bid it at gross margin way below where we'd like to be, and we take the job just to take it. So we have to work on our discipline there, and you are going to see potentially a revenue reduction on that base.

And John, this is Brian. On a productivity front, we've had labor reduction, and the people that we tend to keep are the more productive folks. That would help our margins a little bit as well.

I guess I'm just trying to understand -- are we at a new level of margins? If we've been in this downturn a couple of years ago, my guess is your margins would have been below 4%. 2% or something. What I'm trying to understand is is there something that you've done because of your size or that's changed in the industry that makes margins at all levels or at all phases of the cycle higher in your opinion?

You are forcing us to take credit for being more productive here.

I am. But I don't want to get too pessimistic either.

We are far more productive, far more selective. We have taken the pressure off our operations to grow the top line, just for the sake of growing the top line. And if you push that way, you take risks on projects you might not otherwise take risks. But projects come in all kinds of sizes and shapes and parameters, and where we can sub out a lot and rely on the subcontractors, we are likely to take a lower margin for ourselves. So where there is a lot of equipment where we can nail the price down, we can handle the lower gross margin and get the lower net potentially. But we have 4,100 projects going on right now, and we are bidding twice that many or talking about twice that many as we go forward.

So in many respects, it's very project specific. I'm not trying to set up a smoke screen here. It's really hard to make judgments about aggregate -- in the aggregate when you are dealing with as many specifics as we are and dealing with as many economies, local economies as we are. And we are getting margins in certain parts of the country that we normally get. And others, it's very, very tough.

Okay. Well, that helps. And in terms of acquisitions, then, it sounds like you are going to see more opportunities or you are seeing more opportunities right now. And are these competitors more willing -- the potential competitors or targets -- are they more willing to sell because their profitability is down, or because they just had it with the business?

I would say the ones, it's a mix of people across the United States. The companies that we are trying to buy, we typically talk to them over a long period of time. The most important reason somebody is willing to sell is because they think that we'll take care of their company. Aggressive sellers were cleared from the table a few years ago, so this is really a case of our company and their company, just trying to make sure that we can fit together and do something good. I do think that more people are certainly willing to talk to us right now and I think we'd be bullish not to think that's in part because of their prospects. So we are working hard to balance, making sure we bring the best available companies in the geographies that we find to be attractive into our company, but in a way that serves our shareholders at a price that allows us to get a discounted cash flow rate of return.

John, we are definitely not interested in any company where the management is tired of the business or fears the business. One other thing I'll throw in -- I've said this before, is I think there are a lot of concerns in the part on the private owners about what the tax regime going forward is, and whether or not it's a reasonable time to monetize some things here at current tax rates as opposed to what they might look like in the future, both capital gains and ordinary income.

All right. Sorry to take up so much time. Thanks.

No problem.

Your next question comes from the line of Matt Duncan with Stephens Inc. Please proceed.

Good morning, guys.

Good morning.

The first question I've got, and Brian, you talked a little bit in your prepared comment about what could your gross margins be. And you talked about this a little bit in Q&A already. I'm just curious -- when you talk about project execution, it's probably helping to prop those margins up a little bit right now. As you close out projects that you've executed very well, I don't know if there's any way that you can quantify how much you think that is helping your gross margins and where they could go? I just think we are all trying to get a sense of where you think your gross margins could go from here.

Well, I guess at the end of the day -- this is Bill George, they are going to go down. We've disclosed in our 10-Q that we expect developing weakness through the course of the year. And we are a company that has improved itself vastly since the last downturn. And we are not a company that has -- like a Jacobs Engineering or maybe even EMCOR to some extent -- a long history of having gone through recessions at a time when we were as healthy as we are now. So quite honestly, I think we feel very optimistic about our ability to do things in this recession that we wouldn't have thought we could do in the past. But we really don't have a lot of experience, and this is a business that particularly, when you try to predict this business on a quarterly basis, as you well know, it's a tough business to predict. We take comfort from the fact that we think we have an absolutely great long term value proposition. We can flow cash, we can create cash, and we won't waste it and over time we are going to build a lot of value that way. But a lot of the questions you guys are asking are questions we are asking each other every day.

A different way to ask this is do you track the implied gross margin in your backlog? Is that something you guys track?

We do. However, we are very careful not to use it for analytical or numerical forecasting, mainly because when times are good, companies will not just put extra money in the margin line. They will put extra money in the material line. They will put extra money in the labor line. And when times tighten up, the way that the project can get loaded in backlog it can be very different. We've learned a lesson over 12 years that if you start to simplistically take the gross margin implications out of backlog and rely on them, you can get yourself into a really bad place very quickly. That being said, our gross margins indications and backlog -- it is not like they are falling off the planet, but they are certainly not as good as they were.

That's helpful. And then a couple of things here and I'll get back in the queue. We are hearing that the number of bidders on construction work is probably 3x to 4x what might have been before the downturn, and a lot of bids are being awarded based on price as everyone is trying to find ways to cut back. One, are you guys seeing the same dynamics, and two, do you feel like the strength of your balance sheet is helping you competitively to beat out some of those lower priced bids because you have staying power and the lower priced bidder may not?

That is a very good point, and we brought -- Bill mentioned in his remarks, trying to bring the strength of our balance sheet to the operations and that's one way to do it. We will complete the job and we are not relying on [surety] or whatever. We are going to be there to complete the jobs. And we've had general contractors come to us and talk to us about the fact that they would like to work with us because we are able to do that, and they've had some bad experiences with some mechanicals.

The other side of this is the phenomenon you are talking about, yes, in aggregate you are right. It pertains more to the lower end of what we do than the higher end of what we do. And we just won a project in the central part of the country where there are only two bidders, because the project was a sophistication level that there were only two mechanicals in that jurisdiction that could really handle it. So we have that going for us in many areas. Bill also pointed out that diminution in our backlog and revenues is happening in big urban areas. That's where there is more contractors competing.

A lot of what you say is right on. I think we are responding. Are we going to be perfect? No. Are we immune from the general problems? Absolutely not. What we are relying on, and Bill George alluded to, is our strengths and internal ability that Brian talked about, our productivity, job selection -- we are trying to do, utilize those things to get the best results in a terrible, difficult nonresidential construction economy.

Sure. That's very helpful. And the last thing here. If you look at stimulus, when do you think you might be performing work that is tied to stimulus? And if you had the ability to predict from a revenue perspective, what the stimulus bill could mean for you guys as you look out to 2010? How much can it help offset weakness elsewhere, I guess is what I'm asking? I'll go back in queue, thanks.

Let me throw a macrocomment and Brian can talk micro here. If all the stimulus money is spent, it's maybe 3% to 4%, of construction. The part of the stimulus which could possibly aim at construction to include horizontal construction, it's 3% to 3.5% of the total volume. So even if we got it all and got it all now, it wouldn't help that much. It would stem the tide at the margins, I believe, but I don't think it's going to radically change things.

Okay. Thanks, Bill.

Brian?

Real quick to answer the first part of your question is that we do have a couple of projects that we are working on right now that are stimulus funded, and the bidding activity on other projects has increased as I sit here right now.

Thank you, Brian. I appreciate the answers.

We are tracking it regularly.

Your next question comes from the line of Rich Wesolowski with Sidoti & Company. Please proceed.

Thanks. Good morning. Did you guys close a company in the second quarter?

We did. We closed a very small company in upstate Michigan. It had $120 million in backlog and had revenues -- I'm sorry. $120,000 -- more than all of our backlog decline was from that number. It had $120,000 in backlog and was just very, very small. It was really exiting from a market that was so slow that was really -- on balance, there wasn't enough to gain from staying there to justify the expense.

Brian stated that a great many of the companies were very profitable. Were there any that were unprofitable that had trouble executing their backlog?

Not really. No.

The one we sold.

Just the little one you sold?

Right.

Okay. Is there still a desire to target maintenance companies for these acquisitions or will we see construction deals during the recession?

There is a definite desire to acquire what we call balanced companies, where there's construction and service and the two can wash the other or help the other. Service companies are hard to build, and they tend to want big multiples, and they are small and if you try to integrate them with our current operations you run into integration problems. We would love to find a large service company that worked. And I'm not sure they are truly out there. We are talking to some balanced operations. We are also talking to what you might consider one off situations where they have a demonstrated expertise and a book of business in a specific sector that we judge as a sector which has a long life of work. So we are also looking at that area. We are also looking at companies that maybe have a little greater engineering and design orientation than we've had in some of our companies in the past.

Okay. It seems that you've talked about pricing pressure but you haven't quite said that Comfort is getting aggressive with their bids. Would it be fair to characterize the strategy as maybe holding the margin more so than you would have had in past recessions and supplementing any business foregone with acquisitions?

That would be interesting. I think you would figure that out on a same store basis, wouldn't you? If I got your drift.

Yes.

Also the thing is that the different geographies have different approaches. There are -- it's certainly the case that we're willing to sharpen our pencil and be very very productive and compete for business.

It is different across the country.

Your model that I like is that we are not selling any shares, so we are doing this effective [buying in shares], so we're doing this on the same share base, and we have cash that is currently earning.

Nothing. Less than 1%.

So your model works if we can buy things that produce well, that have a future, a backlog and have a book of business that we can trust.

Okay. Lastly, you mentioned your cash is not earning much. Is it just the debt amortization and the cash interest that is in that interest expense line? It seems odd that you are reporting interest expense with a big net cash balance.

What you have there is -- when you put a credit line, you spend a certain amount of money on fees and legal, and you have to amortize that over the life of the line. We do also have some under $10 million worth of notes to sellers. We've used notes to sellers in acquisitions, not really as a financing vehicle, but as a way to securitize promises that they make to us. So we do have some interest expense there. We can't get away with paying those people 0.5% interest even though we pay them moderate interest rate. So you have enough expense there when there's almost no income, it comes out of the negative.

Okay. Thanks again.

Thanks, Rich.

Your next question comes from the line of Tahira Afzal with Keybanc. Please proceed.

Hi. Good morning, gentlemen.

Good morning.

Good quarter, given the difficult circumstances and congratulations.

Thank you.

Thanks.

Just two questions. Number one, I know you guys are exceptionally cautious on your commentary, as traditionally has been the case. But if I was to look across your different regions, are there some regions where you've seen some potential signs of stabilization and perhaps some improvement?

I think -- it's Brian. I think in particular we are seeing the Southeast and the Northeast stable, and increasing opportunities out West with the exception of Colorado. We are still seeing it very soft.

And you think the Southeast and Northeast being strong is -- particularly the Southeast, is that, do you think that is due to the housing market stabilizing or the Southeast being the first to get hit a while back?

I think part of it it's just the markets we are in. We are in a lot of what people use today refer to second airplane cities and they didn't boom. They -- statistically if you look at lot of the MSAs we're in, you don't see interest only mortgages, you don't see big construction loans from money center banks that were 18 month loans that had to be rolled over in the middle of projects. Those locations just -- they've lived a different life for the last five years, so they get to live a different life for the next couple of years. That's a big part of our strength in the Southeast. And part of it is the Southeast really have underlying excellent fundamentals in the United States, has for a long time now.

Are there any regions where you are seeing the boom phenomenon still to manifest in terms of a downslide going forward? In other words, would there be particular regions that we should be more concerned about going forward and should track a little more closely?

I think the best you can say about most of the West is that the decline, the rate of decline is decreasing. That's a funny way of being positive.

And the glass is almost close to totally empty even though -- ?

Right. We talked about Phoenix the other day. We are seeing, I don't think seeing any green shoots, but we are seeing light filtering through the forest trees. But there is some resurgence thinking and talking. A lot of the problem in California, Arizona, and even the Northwest is financing related. No one is financing any growth, any projects.

Got it. And my second question has to do with tax incentives. I know there's a lot of tax incentives offered on the residential side of the HVAC story. That doesn't seem to be anything that I've come across on the non res side, but to the extent you can comment outside of the stimulus money, is there -- are there any other incentives in place on the non res side?

There was money set aside in the stimulus package for that. I don't think anybody has come out with anything specific yet. We were a little encouraged -- in the past, they've come out with this green retrofit things where they pass things, but they didn't fund them. So they wrote the rules as being impossible to reach. This time, there was funding that earmarked towards sustainable building and stuff like that. But to my knowledge, there's not even draft implementation of any of that stuff right now. They seem to be busy with other things. Maybe the horizontal construction right now.

Got it. Okay. If you can talk about electricity rates -- looks like over the past three to four months there's been more rate increases filed, and it seems over the next three months there would be more rate increases filed. If you go back in your history and in your experience, how much of a lag is there between spending on each retrofit and a lag to electricity rates going up in general?

That's a very, very difficult question. And as you know, all those -- Public Utility Commissions, they are not in all in one state. They're parts of states. And what's interesting when you think about electricity, electric rate, we have gas prices at $4 Mcf or lower, and gas produces nearly half the electric power in the country. And we have electric rates going up. I'm not sure that continues, and in the long run electric rates are going to go up. And we don't do enough economic work to finally come up with an answer to what the lag time might be. There is, but we just don't know that answer.

Got it. Okay. If you were to stake a stab, would it be let's say 2011 plus?

Assuming electric rates go up and stay up, you are asking when does that hit? It takes that long to propose and finance and put projects together, yes. So that's the answer.

Got it. Okay. And last question and I guess it's more for Bill Murdy. Given you have background in the military and all, what are you heading in terms of how this money from the [Army Corps] is getting ruled out? Are there any logistic issues in getting the stimulus money rolled out by 2010? In your experience, can the base be impacted by the logistics that are in place right now?

First, let me say I haven't been a uniform military person for many years, perhaps more years than you've been around, but I do stay in touch with a lot of things. I spent a little bit of time in Washington. I don't perceive that problem. I think going forward, the military transformation of posts, camps, and station provide a better quality of life for our soldiers and sailors and airmen. It's very serious and it's funded. It has got a lot of Congressional support, which is important, and we think it's a robust sector. Not only -- this is not just housing on the military basis. This is redoing what you call offices and facilities of the military, long long overdue. We are still operating out of some World War II and Korean War facility. But we believe that has long legs, and we don't want to overemphasize it. And I think the people in the Navy and Army that I talked to, if anything, they are having trouble processing -- not trouble, but they are challenged to process all the current work.

Got it.

But I don't have a complete book on this either.

Thanks. That's all for my side.

Your next question comes from the line of David Yuschak with SMH Capital. Please proceed.

Good morning, guys.

Good morning.

One of the things that as I've watched you guys over the years, moving that margin up as you talked earlier, that comes with an Atlas problem -- whether it's been something in San Diego, Florida, there's always been a pocket of problems in your portfolio of companies. And despite that, you've been able to boost margins nicely.

I'm kind of curious as you look at the performance of your units today, it sounds like Phoenix was way under. Is there -- some things that suggest that the big problems are really affecting profitability, but there are other units where that gross margin, as you've seen in the past, crept up, where the margins continue to be pretty impressive. I am curious about that portfolio, because you've always said we like to get everybody together, talk about best practices, way to improve overall productivity. I am kind of curious as to the results here with record gross margin. Despite Phoenix has to be a big problem? There might be a couple of other major issues. Sounds like the rest of your portfolio of companies on a gross margin basis are performing very well.

One of the benefits we are getting right now is we are performing a lot of work that was priced at very good times. And in particular throughout this year, we are closing out work that's performed very, very well. And it's a testament to the improvements that you are referring to. One of the other interesting things that happened, just like percentage of revenues that your SG&A reflects can look bigger when your revenues have come down. The same thing happens when you have pickups on project. As your revenues are coming down, those pickups -- they are a larger percentage of the revenue. We mentioned in our remarks that we have outstanding, some outstanding recent performances in places like Central Florida and Maryland, and those have a really nice effect in margin and that effect is emphasized when your revenues come down a bit.

So I guess the issue going forward is stop hemorrhaging in some of the bigger problem areas, you [offer] somewhat -- ?

I don't think we are hemorrhaging.

Hemorrhaging is probably the wrong word for it.

Phoenix by the way, David, is nicely profitable currently at reduced volumes and has reacted well. We are concerned about backlog, future of work.

As far as that goes then, leading into the next question, the recession has been here in a lot of areas in nonresidential for quite a while, as you said, institutional. The primary reason why institution has done so well is because the rest of the business has fallen off, and institution has been the area of strength for the last 12 to 18 months. As you look at -- which would suggest that the pipeline could be growing, potential opportunities where you have very depressed areas. I'm just kind of curious as you look -- give us a description what the pipeline looks like. Is the pipeline building, but the interest is on a longer term basis to get that from start to finish? Just give us a sense as to what is happening. In this environment, pipeline could be big but the timeline is longer.

This is Brian. Our pipeline is big, but it is taking longer for awards to come out, if that is your question. Even after you bid, relooking at the bid, et cetera, et cetera, you are right. It won't be as quick as it was in the last few years.

How much do you think that timeline has been stretched out from -- have had in your experience over the years?

The answer is interactive with people's perceptions of what's going on in the larger economy. There are across the United States businesses, have very strong balance sheets, particularly if you take away people who got involved with private equity. We have by far the strongest business balance sheet we've ever seen. Many of those businesses now have building needs and I think a lot of them realize this is a very good time, a very unique opportunity to build and that is why we find our estimating department to be very busy. There are a lot of people who don't want to miss this opportunity across many of our clients. But on the other hand they are just holding off trying to make sure, it's an interesting -- I think it's somewhat interactive -- it's a confidence game. You'll see a lot more of them come towards the market when they start to feel a little more comfortable with the underlying environment.

Do you think it's more the idea of looking at cost of construction today compared where it was two years ago? This really wasn't the catalyst of going to the drawing board?

You can get a lot more for your construction dollar today, and a lot of them don't want to miss that, but they can't quite bring themselves to pull the trigger.

That's all I've got. Thank you.

With no further questions in the queue, I will now turn the call back over to Bill Murdy, Chairman and CEO, for closing remarks.

Thank you all of you for attending on a Friday in the summer here, and we'll see you in three months on the phone and perhaps in the interim face to face. Thank you.

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