Comfort Systems USA Inc (FIX) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q3 2009 Comfort Systems USA earnings conference call. My name is Caitlin and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator instructions.) As a reminder, this conference is being recorded for replay purposes.

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

Thanks, Caitlyn. 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-Q, 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 Brian Lane, our Chief Operating Officer. And Bill Murdy will open our remarks.

Thanks, Bill. Welcome, everyone. After the close yesterday we reported $0.25 a share versus $0.34 a share in our record-setting third quarter of '08. On a year-to-date basis we're at $0.69 a share versus $0.92 a share last year. And revenues are down 14% quarter to quarter and 12% on a year-to-date basis. However, on a percentage of revenue basis we are still showing a very respectable 5.4% net pretax. And all of the foregoing we feel to be a very good performance in what is, let's say, a challenging economy here.

Our backlog on the project side of our business is down about $85 million from last quarter's backlog, and we're at about $554 million here. We voluntarily dropped one large project out of backlog and there will be some further comments on that, I think. But most of the reduction is, again, due to decreased economic activity.

We are seeing a reasonable pipeline of new work, possible work. But new works are much slower in coming to us or anyone than they have been in recent years. We believe going forward that we will get at least our fair share of that work that's out there when the triggers are eventually pulled. By the way, a full 50% of our construction work and backlog is in the healthcare, schools and government sectors. And new construction overall is now slightly less than 50% of our revenues. For lots of years we've been trying to grow the service side of our business, which includes retrofit, to 50% of our revenues. We are there as service revenues have not declined nearly as much as construction revenues.

As a last comment before turning this over to Bill, we continue our close attention to expense control and cost reduction. And our diligent and expert workforce around the country has increased productivity in this very challenging period.

Bill, why don't you take some time with some financial comments?

Thanks, Bill. As Bill noted, we posted solid third-quarter results in a challenging environment. Revenue was $292 million during the third quarter. And the planned decrease in multi-family activities continued to be the single largest contributor to the year-over-year revenue decline. Additionally, we experienced noticeable declines in activity levels in our Phoenix and Virginia subsidiaries. In comparison, our work in the institutional sector remained strong and we continue to see good service and small project availability in virtually all of our markets.

Gross profit remained strong in the quarter, improving from 19.2% in the third quarter of 2008 to 19.7% this quarter. Operating income margins, as Bill said, remain at very favorable levels, coming in at 5.4% for the third quarter and they're about 5% year-to-date. These positive results are thanks to solid execution and include very strong results in Maryland, central Florida and our operation based in Syracuse, New York.

Since last quarter our backlog has decreased to $554 million. We've seen the largest backlog declines at our subsidiaries that specialize in large projects. And the decline this quarter included the unusual element of a removal of $21 million in backlog as we were replaced under a contractual convenience provision when we declined to reduce our pricing on a large ongoing project in the Southeast.

The largest element in our year-over-year backlog decrease is the intentional decrease in multi-family activities which accounts for $82 million of the year-over-year decline. SG&A expense decreased by $3.4 million or 7.5% as compared to the third quarter of 2008. As a percentage of revenues, SG&A increased due to our lower revenue base. During the quarter we had higher medical costs of approximately $1 million compared to the third quarter of 2008. That higher medical cost resulted primarily from changes to COBRA laws and the resulting increase in our COBRA census and costs. Overall, we are pleased with the results of cost control efforts and we feel that these efforts will continue to benefit us as we move forward.

Our stock repurchase program continued this quarter and we have now purchased 844,000 shares in 2009. Since our program began a little over two years ago, we have repurchased 4.1 million shares and returned a total of $46 million to our shareholders. And over that period, we've reclaimed shares equal to over 10% of our current share base.

Our balance sheet remains rock solid. We continued our long record of producing cash flow for our shareholders with a remarkable $23 million of free cash flow this quarter. We currently have $140 million in cash with nominal debt. Our unused credit lines are favorably priced, have borrower friendly covenants and do not expire until 2012. And we plan to continue to seek ways to prudently deploy our balance sheet strength into our operations and acquisitions as good opportunities arise.

Given our financial strength and the quality of our field professionals, we believe we will continue to improve our position in the mechanical contracting industry in the coming quarters and years.

And that's all I have on financial. So now I'll introduce Brian Lane, our Chief Operating Officer. Brian?

Thanks, Bill. Good morning, everyone. We have very good results for the quarter, both in the construction and service side of our business. We would like to recognize and thank each of our talented and dedicated team members for their efforts in this challenging market. In particular, we are very pleased with the result of our focus on cash and collecting receivables. Free cash flow improved both sequentially and year over year with $23.1 million of cash flow in the quarter and an increase in cash balances to $140 million at the end of Q3.

Every day we focus on the basics of our business, which include project selection, estimating, project pricing and project execution. Our construction groups performed very well this quarter and closed several projects strongly. Our service operations have also helped to maintain our profitability. We continue to invest in our service operations. We have improved the management in several of our service organizations. We are expanding and improving the training and education for our service technicians and continue to upgrade the quality and training of our sales force. In the coming months, we will be further bolstering our service sales efforts.

We continue to see results from our investment in energy services. We have increased our resources and enhanced our knowledge and expertise in the area of energy efficiency and involvement in LEED-certified projects. These investments have not only resulted in increased project bookings, but have assisted our efforts in securing large multi-year maintenance agreements.

Our focus on safety continues to be a key strength of our company. And our OSHA recordable rate remains 48% below the industry average and continues to improve. This is outstanding, and again, the result of a continuing focus in our operations.

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. And there appears to be other work in the pipeline which is not yet in backlog. Our backlog, while still at solid levels by historical standards, has been declining. Backlog at the end of Q3 was down 13% sequentially. The decrease in the third quarter is mainly related to our Arkansas, Wisconsin and northern Florida operations. We had a large job in Arkansas which we agreed to leave as the customer attempted to renegotiate the contract at a much lower margin. On an encouraging note, after two years of weakness in California, our backlog there increased significantly this quarter.

We continue our efforts to find the more active sectors in the market -- government, healthcare, education. For the first time in our history, over the last two quarters more than half of our revenues were from the institutional sectors. Our pipeline remains very active and we have had a number of good bookings in October, especially in the Northeast, Southeast and Arizona. In particular, we were recently awarded multi-million hospital projects in both Arizona and New Hampshire.

As we said last quarter, we continue to see softness in the West, despite the early signs of improvement in the California markets. The Northeast and Southeast continue to be stable. Further, we continue to see pricing pressure as local and regional competitors respond to challenging conditions. But we remain committed to maintaining good margins. We expect that weakness in non-residential activity will continue over the next nine to twelve months. We have been actively addressing these challenges to minimize the negative effects of a continued downturn.

We continue to focus on cost control. Currently our headcount is down 5% sequentially and 20% -- 21% year on- ear. Additionally, SG&A costs at the field level are down $5 million on a year-on-year basis. And we continue to monitor our costs to insure that we have the appropriate level of SG&A in light of our revenue projections.

We are positioning ourselves to improve our competitive position in our various markets. We are making additional strategic investments in service and training. Our strong financial position and bonding capacity remain a competitive advantage. And we are prepared for strong performance when our markets improve.

I am confident that we will continue to acquire more than our fair share of upcoming work. We remain committed to project execution, cash discipline and cost control. Again, I would like to thank all of our almost 6,000 team members for a great nine months.

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

Thanks, Brian. While we're looking forward, our focus, of course, remains on current operations and we believe we're very well positioned to take advantage of available work and easily capable of increased activity when economic activity turns up. Bill mentioned our balance sheet strength. That balance sheet strength and the ability to deploy it is a real advantage at times like this. We can fund initiatives which will benefit us in the future. We can bring in new people to staff those initiatives, et cetera. And we can also take advantage of discounts from vendors because of our impeccable credit rating.

We are also, as mentioned, interested in growth by prudent acquisition. And we believe there are some exceptional opportunities in front of us in the next months.

At this juncture, I'd like to turn this over to the operator to start a question and answer period.

(Operator instructions.) Your first question comes from Matt Duncan of Stephens Incorporated. Please proceed.

Good morning, guys. Congrats on a good quarter, all things considered. The first question I've got goes back to your gross margin. You guys have been doing a very good job managing project costs and continuing to execute well in holding up your gross margins. How much longer do you think that can continue? And are you starting to sort of get into some backlog that was priced in more difficult times? And should we continue to expect your gross margins to go down a little bit going forward because of that?

Let me make just a couple of comments and then perhaps Brian will address this. I think that in this quarter we had some very good close-outs on some jobs. And we've got this mix situation in our business. As you know, Matt, our service business carries with it generally a higher gross and net margin than does our construction business. So we have this junction of closing out some very good jobs and also the mix. In general, the work we are booking is at lower margin -- lower gross margins prospectively. We think we're grinding in a lot of new productivity here, and we may be able to net a few basis points greater in these new jobs. But clearly, there is margin compression ahead of us on new awards. Brian, you want to add to that?

Yes, just a little bit on that, Matt. There is margin compression. But we've done a lot in the last few years to mitigate some of that in terms of productivity on the labor side, the effort we've made in prefab, and the training we've done. So there is some pluses as well as margin compression, too.

Okay. And when you guys look at the competitive environment and the pricing pressures that you are facing, do they seem to be getting worse or has it kind of stabilized in terms of the pressure that you're getting on price as you're bidding new contracts?

I would say that there are two ways to look at that question. Keeping in mind that we're a late cycle player, so we're starting to book work that we've been working on for a while. I would say it's starting to get worse. The immediate work is certainly worse because, like I said, we lag the business cycle. There are signs of improvement, but at the end of the day, it's probably too early for us to draw conclusions from them.

Okay. And when you look at your backlog decline from the second quarter to the third quarter, you mentioned one large project that you took out of backlog. Were there any other project cancellations? And then specific to that one project that did come out of backlog that was fairly large, talk a little bit about sort of what the -- what drove that? It sounds like your customer asked you to rebid and it was at a margin that was too low?

Yes. We -- this is only the second time in 12 years that we've taken a large project out of our backlog. The other one was about eight years ago in Alabama and was because the project fell through. In this case, the underlying contract had a clause that allowed a termination for convenience. Now in the event of a termination for convenience, we were to be made whole. I think the builder or the, really, the owner, felt that over the course of this very long and very large project the market had gotten much, much better for somebody who wanted to build a building and decided to go back out to every single subsidiary on the job and demand much lower maximum pricing on the job.

And when we looked at the proposal that they had for us and in our prospects in that market, the other work we were doing, it was clear that the best outcome for us was to let them bring somebody else into the job. And so that's what we did and we're absolutely confident that that was the right decision in that case. We've been paid virtually all that we were owed on the job and were able to lock it in at a good result for the work that we did. And we were able to use those resources and we've been able to redeploy those resources in a way that is far superior to what was being proposed to us.

And in terms of any other cancellations out of backlog, was there anything else of note?

No, like I said, this is only the second one in 12 years, so.

Okay, the last thing here and I'll hop back in queue. You guys are obviously building yourselves a pretty nice cash balance here. Talk a little bit about what your plans are for that cash. I know you have a buy-back program and that you're actively seeking acquisitions. Did you buy any stock this quarter? And then on the acquisition front, are we still in an environment where potential targets are wanting to be valued off of unreasonable past results versus sort of what the conditions that we're in now? And when do you think the acquisition market may thaw?

Let me address this. Bill may want to add to this. First of all, we have another use of cash, and that's paying a dividend, which we intend to continue. We did buy stock in the quarter and Bill can give you those numbers.

On the acquisition front, what's -- the kind of companies we want to bring into Comfort Systems are companies that currently are doing well. Because they're well positioned in their markets; they've got good work; they continue to do that. And in many cases, the owners simply want to -- they don't want to sell now because they'd like to enjoy 100% of what they've got. As that runs off and they move into work that -- where the margins perhaps are not as great, where there's greater uncertainty, where their backlog is down in an absolute sense, they get more reasonable. And also get more reasonable about valuation going forward.

They are also driven by concerns about potential new taxes, increase in taxes. Maybe it's time to take some -- to monetize the future here at these rates as opposed to waiting when you're going to pay higher rates, both probably ordinary income and capital gains. So there are some things coming together here that at least indicate that the market for these private companies -- and it's not a perfect market -- without some other things, none of these things happen. In other words, if someone doesn't want to sell for some other reason, it won't happen.

But I think there are some positive signs that we can get to more reasonable multiples on future acquisitions. We've targeted a lot of things. We know where we want to go. Our generalized strategy in this area remains that we want to move into new geographies. We don't want to bring a company in on top one of our current operations. Secondly, we want to buy companies that have a balance of business, both new construction and service. And we want companies where the managements are ready, willing and able to continue in place.

So that's a long answer to your question, Matt, but I think it gives you the flavor. Bill, you may want to talk about other uses of cash?

Well, just the data. We bought about a quarter of a million shares in the quarter. And as Bill said, we're committed to acquisitions. We will do acquisitions, but a little bit of patience right now, probably is -- we're confident that that will pay off.

Okay. Thanks for the color, guys.

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

Thanks, good morning.

Hi, Rich.

Can you talk about the performance, the stability of your service business relative to what you would have expected heading into the recession?

Well, on the service end small project side, it's been relatively stable. It has deteriorated in some places a little bit. But our maintenance base is holding its own. So we're very confident going forward that that we'll perform and continue to grow.

Okay. It sounds from your previous answer to the last caller that you're aiming to buy companies with similar construction mix to those that you now operate. I've heard you guys say several times that the service is the better part of the business. It's more stable, it can be more profitable. Is there a push to increase the service mix of the business through acquisitions?

I would say -- this is Bill George. I would say what we want to do is buy the best companies in the markets -- in the best markets. And we have many companies that don't do a lot of service that really do unbelievable -- have unbelievable results for us. I think that over time there certainly is a goal to be a company made up of full service mechanicals or to be able to offer a full range of services in the markets that we're in. And I think we're making great progress towards doing that. I think an awful lot of our service investment you'll find will come through internal investment over time. We have been investing really through -- really mostly through SG&A, through the expense line in improving our service. And the fact is that's an area that is a very, very good focus for us as far as an internal investment. Bill?

I think that's right. It's -- first of all, Rich, there aren't any large pure service companies. There aren't any large companies that are predominantly service. So Bill George's statement just a moment ago that we want to do this organically internally is a very good one. We can grow our own service activities. We are, candidly, we're going to spend some money doing that internally. It's not capital money; it's expense money. And we're in an advantaged position. We've got the cash resources to do some things which were -- and that's aimed at a little longer term than next month or next quarter, i.e., building up service capability, bringing in rainmakers, if you will. And we're on that program. And we can afford it.

Okay. I was surprised to hear that backlog increased in California. Was that a wild card project or two that hit this quarter? Or does that reflect what would be a pretty surprising general pickup in that bidding activity?

It's a combination of both pickup and bidding activity, but also a couple of good-sized jobs on the military front.

Okay. But you would still say the West is generally your weaker region among them all?

Yes, oh yes. Absolutely.

Okay. And then lastly, Bill George, your net over-billed position shrunk a good bit in the quarter. Would you expect that to continue as you move through the [remainder] of the recession?

I would. It shrunk -- it especially shrunk on a dollar basis because there are other lines on the financial statements that are shrinking. I still think we have -- we had extraordinarily good collection statistics in the quarter. We feel great about our ability to have a very, very disciplined balance sheet. But it's certainly the case that we'll become less over-billed as we move deeper and deeper into a work mix that reflects more recent bid activity.

Great, thank you.

Your next question comes from the line of Clint Fendley of Davenport. Please proceed.

Thank you. Good morning, guys. I know you've indicated in the past a belief that you would be able to sustain your 4% operating margins throughout the downturn. I wondered if you still felt that this was possible, given the decrease that we've seen in the backlog this quarter?

Clint, I agree that we've said that before. And I stand by it. I mean, I think the combination of our business mix, our revenue mix, which includes service, and our ability to adjust to circumstances -- i.e., we are in some great part a variable cost business -- and our willingness to discipline the cost side of things will allow us to do that. And really -- I should have said that a little differently. We can push to get greater productivity here, even greater than we've got. It gets more difficult as you do more and more here. But I'm confident at this point that we can. And some of that, candidly, relies on things not getting too much worse than they are. So -- but I'm confident.

And if I heard you correctly, 50% of your backlog is in healthcare and government. And I know healthcare is one area where historically you've had a bit higher margin, more -- is that still the case? And if so, would that possibly allow you to sustain your margins maybe better than expected?

Just to give you a little color on that, actually well over 50% is in institutional, which we consider to be health, education and government, of our backlog. And actually, over the last two quarters more than 50% of our revenues for the first time have come through those lines. Now year to date we aren't quite at 50% if you combine those three lines. So that's very encouraging. It's been a -- it's been an evolution of this company the whole time I've been here, which is 12 years, that we've done more and more of that work. It's nothing new, but certainly is coming -- it's really bearing fruit at the moment.

On the margin question, I think you get behind why are there greater margins in hospital work, for instance. It's a more difficult area to work in and you get paid for your expertise. And we've got the assembled expertise and we've got a track record of doing that. We do some fair amount of work for bio-pharmaceuticals who, when they look at all their costs, their facilities costs, they're [rounding] their relative -- all their costs of science and experimentation and people and that sort of thing. So they -- and they want their facilities up and done, done right -- right away. So there's margin there. But it's a good sector for us and something we've got a demonstrated record in.

And a last question here. A lot of talk, obviously, this morning on the service side of your business. How is the pricing holding up in that area?

Well, the pricing is challenging in the service side of the business. It has not dropped anywhere near what it has in construction. Some of the small projects have been deferred. But we're very confident going forward that the service margins will hold where we are right now.

The big-box guys and the retailers, et cetera, are very cost conscious at this point here. And there's some deferrals, delays and some pressure on some things that make that a challenging area.

Thank you, guys.

Your next question comes from the line of Matt Tucker of KeyBanc Capital Markets. Please proceed.

Thank you. Good morning. Are you guys able to provide any more detailed kind of commentary on the current activity and outlook, kind of on a sector by sector basis? Obviously, institutional is holding up better than kind of anything else. But I guess what kind of activity are you seeing there and expecting going forward?

I would say that most of that is driven -- an awful lot of what we know about that, some if it comes anecdotally. Some of it simply comes from doing a lot -- spending a lot of time studying industry sources. The areas of weakness are very, very predictable. Retail is probably the weakest. Luckily, we don't do a lot of retail. Office buildings, very weak. And then you've got the remaining commercial sectors that fall somewhere between there and institutional, and then all three areas of institutional. I would say some of them are flat which makes them strong. And in a few of them, there is actually signs of growth in them, maybe -- hopefully, stimulus-related growth. So any -- Brian, anything else jump out at you? Anything you would say different that that?

No, I agree with what Bill said.

Thanks. Well, that leads in well to my next question. I was just hoping you could provide a little more detail on those stimulus-related opportunities that you're seeing. And I think you mentioned a couple of awards and then some other opportunities. If you could just provide a little more detail on what you're seeing there?

I would say one of the interesting things when you're scratching your head about what the stimulus is doing. There are two things that it can do. One, it can create a project. So for example, it can crea- -- there's a transportation project we have in Delaware that really is unambiguously stimulus related. But it can -- in certain states, the main effect of stimulus is to keep something that was needed to happen, was already about to happen, to keep it on track. And so I'd say that the remainder -- the remaining stuff would be the continuation of certain education work that it stands to reason some of it might have fallen away if the states didn't have access to that money, something that was going to be funded by property taxes, for example. We have come to the conclusion that some of that work continued because of other sources of funds in certain circumstances.

So I guess nothing kind of remarkable about the nature of those projects, just maybe some incremental activity supported by the stimulus?

Nothing remarkable.

Nothing remarkable.

Okay. And then I just was hoping you could provide a little more detail on the kind of productivity gains that you had mentioned and what's behind that.

On the productivity front, over the last several years we've actually done a lot of things here at Comfort Systems. One of them is we did a lot of training at our project management superintendant level that's really paying off for us on the labor management side. Our focus on prefabrication over the last number of years has really reaped a lot of benefits and is right now a part of our culture throughout the organization, which is terrific. And the third bit is we've really stayed cost conscious even in the good times. And we've kept our focus here. So I'd say those are the three big drivers on that side, Matt.

Matt, on this prefab side, what we're really talking about there is prefabbing and building in our shops or on our shop floors -- sheet metal structures, plumbing structures, et cetera, rather than doing that on-site. Clearly, you can imagine how much more efficient it is to do that in a shop than crowding yourself into the fourteenth floor of a building to do it.

Thanks very much.

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

Good morning, guys. As far as -- just kind of want to explore a little bit with this military business that you're doing. I know a few years ago you had to break-out the other category because of the success you're having with institutional healthcare, education and the rest. You don't do -- you have not historically done much with military. Is that a market that could evolve much like we've seen in the institutional area, particularly given some of the initiatives by the government for updating the military infrastructure?

Yes, the only exception I would take with your premise, Dave, is that we have done over a long period of time work with the military. Not an overwhelming amount, but we've done work at Fort Drum, New York. We've done different naval facilities. Most of it is housing or near housing. It's the bachelor, enlisted quarters and military housing. There is not only that to continue certainly in the military construction budgets, but there's also the renovation of a lot of military facilities. In other words, they're not going to do it all with new construction. They're going to take some of the stuff and renovate. And we're not doing a great deal of that now but we intend to. And we're also looking at potential -- bringing -- potentially bringing in some other companies that focus specifically on that. I mean, as far as we can tell from our work, that the money is there and the military will continue to do that to improve the quality of life for our soldiers and to upgrade their facilities.

In addition, we actually have a new job in Guam and the US military, Air Force, Navy, Marines, Army, is moving out of Okinawa and moving all of that into Guam. And we've got a relatively large contract there with the potential follow-on of another one. And this is -- the total construction budget out there over a few years is going to be $16 billion, something like that. So there's work there. And we can -- while we won't move people from the continental US out there to do it, we will have supervisory forces that we will design and construct and work that business.

That's why -- the point I was trying to get to was I know you had done business but it's never been as visible potentially as it could be in the course of the next couple of years. Just like healthcare and education weren't as visible. Isn't that kind of what you're maybe suggesting, is it could become a more visible revenue string for you then?

Yes, I think so. I'm not sure we'd break it out on our charts or anything out of the government sector. But it might not be that visible.

Okay. And then one other question, as far as resources into this downturn, could you give us some sense of how much your headcount has contracted from its peak, and maybe even from maybe last quarter as you prepared for this -- the recession? And in looking at the recovery, what's your thought as headcount? Because as you guys said earlier, you spend a lot of money on a lot of people getting them trained. Are you going to miss some of that coming back? Or is your strategy on existing headcount comfortable enough to where you feel good about what you have right now, that there's not much of that going to happen? Or are we going to need another down leg before you maybe begin to address the headcount?

Okay, this is Brian, I'll take a shot at this one. Peak headcount, David, was around 7,200. We're about at the 5,700 mark right now. And we peaked mid-2008. In terms of the quality of the personnel, right now we've got our A and B players, no question about it, the people that you let go are the lower producing players. Right now we're down to the people that we really want to hang onto. So hopefully we're not going to have to reduce much further. Right now we're really in good, strong shape going forward with the talent that we have.

The other thing we're looking at is there's a lot of good talent that is still available out in the market. And we are taking a hard look at that if we need to upgrade in certain places. So it's a great opportunity for us to improve even what we have already, so.

When you mention upgrade, now what's your thinking there as far as just some geographic areas upgrade or extensions of capabilities, services -- give us an idea?

Particularly, it's a project management, superintendent level in our current operations. Looking there, not so much geographically at the moment, but just in our incumbent operations.

Dave, we're pretty happy with our existing analysts. Don't worry..

Yes, well I was perspiring here, given what's happened in this industry. Just trying to make a good thing better for you guys. But you're doing a good job already. Thanks.

Thanks, David.

Okay.

Your next question comes from the line of John Rogers of DA Davidson. Please proceed.

Hi, good morning.

Good morning, John.

Just a couple of quick things. Just on terms of the organic backlog growth, and I apologize if you said this, the decline, was that all same-store?

Organic backlog growth.

I mean, sometimes you give them the same-store backlog growth?

Since we haven't acquired anything, it is same-store, yes.

Yes. Okay, I just wanted to confirm that. And then secondly, what we saw earlier this year, especially the decline in power costs and in some cases lower electrical rates. And now they just seem to be going the other way or potentially maybe going the other way. Does that have any impact on your business?

I'd say, yes, it does. We -- I think in times like this people will put on hold energy efficiency projects. And if they see also a dip in energy prices which result in lower electrical costs (inaudible) basis, they will have a tendency to. They don't believe -- I don't think anybody believes that electric costs are going to go down any further nor stay down where they are even. So that will come back with available capital. It does take some new capital to capture the energy efficiency that we can help people capture. And we're looking to that sector to be a real driver of that business, energy efficiency going forward to be a real driver for us. Because, as you know, John, 40% of the energy consumed in a heated, ventilated air conditioned structure is by virtue of HVAC. So we can save money by making those systems more efficient and we can -- and some of that is through just maintaining them. Some of it's through retrofit. And then on the new construction side, we will be working with the end users and general contractors, to design in the latest energy efficiency.

But is it your perception that that outlook from your customers is changing at all? I mean, especially as we go into -- I know it's --

The perception is that people have just -- they're not focusing or they're not spending new capital to capture those savings right now because they're capital constrained or they -- they've decided they want to be capital constrained. One of the encouraging things here is the amount of cash that is out there, both publically and privately in -- both in public companies and private companies. I think they're going to turn to utilizing some of that cash to capture savings.

John, here's an interesting case in point. We're talking to you right now from new premises, from new corporate headquarters.

Yes, I noticed that on the Q, the new address.

We moved into these new headquarters to save money. We actually lowered our cost of occupancy by moving. But obviously, we had to build out the space which created work for a bunch of contractors, and we built our space to a LEED standard with some focus on energy efficiency. And what was interesting about that process was nowadays you're able to do that without paying much of a premium. One of the interesting things that's happening is some of these efficiency things are simply becoming part of the business. And they become a very, very good tailwind because they give you additional reasons to do things without having to spend crazy amounts of money.

So I actually -- I'm actually encouraged by some of the costs, some of the cost effective ways that are being developed to save energy. I think that's going to do -- that's going to be good for us.

Okay. And one other thing is in the past some of these cycles we've seen the OEMs get into the service business, then get out of the service business or at least de-emphasize it a little. What's your sense of their temperature now? Are they interested in getting back into this business now? Or are they pulling away from it and letting independent contractors handle it?

John, I -- they're still in it. They've never left it. We see them, we compete with them. Sometimes we work for them. Sometimes we partner with them. It's the full gamut. They're going to be out there and we just need to keep ourselves competitive because they're not going to go away.

But they -- we have a number of advantages. First of all, we're equipment agnostic and we range across all the equipment. Secondly, we are nonunion. And we have a different cost structure, and even if we do have to pay in certain markets what the union levels are, we have flexibility beyond what some of them have. So we feel fine here on that. We're going to do it. And in a lot of cases they're only interested in the bigger work anyway. And we're middle market -- middle-size project oriented, as you know.

Okay. And then just last thing, sort of final question. As you look at the acquisition opportunities that are out there, I mean, some of the -- my perception is that some of these smaller private companies and the ones that may be potential targets do not only the mechanical systems but they venture out of that a little bit more, some of them into piping or electrical work. And are you looking at any of those adjacent service opportunities or markets?

We're not looking at them in a broad way. That would not preclude us, however, from bringing in a company that, say, for instance did electrical work or controls work or -- and plumbing certainly is something we -- 15% of our revenues come from plumbing and piping right now. So we're certainly there. But we're not -- in the grand scope, we're not thinking corporately about being also an electrical contractor or also a roofing contractor, for instance.

We think there's a very rich business here, a rich strain of business here. We're $1.2 million, $1.3 million -- billion in a $40 billion sector and we're -- while we're nationwide, we're geographically deprived in many respects. We're not in a lot a whole lot of places. So there's a lot of growth for us and we don't -- and we honestly consider the HVAC mechanical area a better part of the specialty construction business than many of the other -- most of the other specialty construction trades.

Okay, great. Thank you very much and congratulations on the quarter.

Thank you, John.

Thanks.

You have an additional question from the line of Rich Wesolowski. Please proceed.

Thanks, I was hoping to -- or how you could clarify the discussion on the 4% operating margin. You discussed in the past, said your operating company managers are incentivized on maintaining 4%-plus. But I assumed that that number didn't include about, say, 1% in corporate overhead that's included in your income statement?

That is correct. So to achieve 4% overall, the operating entity, the operating -- have to do substantially more than that. And they do. And they are.

So to be clear, you are standing by an income statement margin of 4%?

Pre-tax.

Pre-tax, right. Okay. Thanks.

There are no further questions at this time. I would now like to turn the call back over to Mr. Bill Murdy for closing remarks.

My only remark is to thank you very much. And as Bill said, we -- while we're having to let some people go internally, we're not letting any of our analysts go. You've been with us too long. So thank you very much.

Bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation and you may now disconnect. Have a great day.