Comfort Systems USA Inc (FIX) 2009 Q4 法說會逐字稿

Good morning ladies and gentlemen. And welcome to the fourth quarter 2009 Comfort Systems USA earnings conference call. My name is Chanell 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. If at any time during the call you require assistance, please press star followed by a zero and a coorindator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host of today's call Mr. Bill George, Chief Financial Officer .

Thank you, Chanelle. Good morning, everyone. Welcome to Comfort Systems USA's first quarter and year end 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 Brian Lane, our Chief Operating Officer. And Bill Murdy will open our remarks.

Thank you, Bill. For the full year we earned $0.89 a share on revenue of $1.13 billion versus $1.24 a share on revenue of $1.33 billion in 2009. -- in 2008 excuse me. That is a revenue reduction of about 15%.

For the fourth quarter reported $0.20 a share versus $0.32 a share for Q4 '08. Revenues for the quarter were $257 million in the fourth quarter of '09 and $328 million in the last quarter of 2008, that's a 22% revenue reduction. Precash flow for 2010 was $46 million verse $69 million in 2009. Notably cash at year-end was $128 million versus $117 million at year-end 2008. And we used $20 million cash -- $20 million of cash in 2009 for the repurchase of stock and paying dividends.

Backlog, another story. Backlog for the project side of our business at 12-31-09 was $550 million, compared to $752 million at 12-31-08. And that $550 million is compared to about $554 million at the end of the third quarter of '09. A full 50% of our construction work and backlog was and is now in the health care, schools and government, including military sectors. We indeed believe we are seeing at least some effects of stimulus spending, but while taking advantage of public and quasi public spending, we have seen substantial dimunition of activity in the commercial and lodging and office sectors. You know for years we have had a goal of reaching 50% total revenues from the service side of our business, and as you recall, we define that as maintenance and repair and retro fit. With the decrease in new construction activity, we have achieved that goal of 50% revenues coming from service. In a manner not necessarily wished for, ie. service revenues have not declined like new construction revenues.

On an overall basis, our percentage of revenue showed a respectable pretax net of 5% for the year 2009 versus our record 6.1% for 2008. Q4 '09 was 4.6% net pretax with our gross profit down. And SG& up -- SG&A up slightly. At this point, I would like to turn the mic over to Bill George, our CFO and then to Brian Lane our Chief Operating Officer, for some details and depth. I will come back later with some forward looking comments before we go to Q & A. Bill?

Thanks Bill. As Bill noted, we posted strong fourth quarter and full year results in view of difficult industry conditions. Gross profit and operating income margins were generally lower but remain strong in the quarter and for the year.

Overall, our gross profit was 21.3% in 2009 compared to 22.2% in the same quarter last year, and full-year gross margins increased from 19.7% in 2008, to 20.0% for the full year of 2009. The strong margins reflect the close out of successful projects in D.C., central Florida, and upstate New York.

Our OI margin for the year was 5% which while down from the spectacular results we achieved in 2008, still represents a very strong year. Our annual and quarterly margins reflect our commitment to project selection and profitability in tough industry conditions. Predictably, the same commitment contributed to our lower revenues and our fourth quarter of 2009 was $71 million lower than the same quarter in 2008.

As Bill mentioned, quarter over quarter backlog decreased by $4 million, however, because we acquired operations at year-end that had backlog, the same store quarter over quarter backlog comparison reflected an additional $27 million decrease, and we are also substantially below our year earlier levels. Although our backlog has come down as nonresidential construction market fundamentals have continued to weaken, we feel that when viewed in light of historical trends, our backlog remains at high levels and supports our expectation that we will maintain profitability and preserve the core of our business in 2010.

With regard to our recent acquisitions, because the two larger acquisitions closed on the last day of the year, their backlog and balance sheets are included in our results, but their results of operations, net of amortization relating to their intangibles such as backlog and customer lists will be in 2010, that's when they will begin. Because of the amortization, although we expect they will add to EBITDA they will not be noticeably accretive on the EPS line in 2010. These are two really good operations.

Our SG&A decreased by $12 million for the full year. However, because revenues dropped faster than SG&A expense, SG&A as a percentage of our revenues increased both in the quarter and for the full year. We've continued to make investments in our business and we continue to benefit from the aggressive cost control attitude we adopted in late 2008. Although we continue to focus on cost control in the markets that we serve, we believe our cost structure is fundamentally well positioned for 2010. To add a little more detail to our numbers let me briefly update our progress and accruals relating to the multi family challenges that we experienced a few years ago.

We closed a number of open matters during 2009 and our remaining Atlas operation, although much smaller, was profitable. At the end of 2008, Atlas had a total of $5.8 million in accruals relating to claims and contingencies on certain of its legacy jobs. As of the end of 2009, this overall accrual stood at $6.5 million. We're continuing to vigorously pursue the remaining amounts we're owed and we believe that we are adequately accrued based on our understanding of all open matters and issues.

During 2009 we had $46 million of free cash flow. Although our fourth quarter 2009 collections were considerably less than the remarkable fourth quarter numbers we posted in 2008 and 2007. Although we expect overall headwinds in 2010, we expect to continue to earn money and we expect to translate those earnings into solid cash flow in 2010.

Our stock repurchase program was active in the fourth quarter, as we purchased 368,000 shares. And we purchased 1.2 million shares for all of 2009. During 2009, we returned $13 million in cash to our shareholders through this program. And since we began buying shares a few years ago, we purchased 4.6 million shares, returned over $50 million to our shareholders, and reclaimed more than 11% of our outstanding share base.

Our balance sheet remains rock solid. We have strong cash balances and nominal debt, and our unused credit lines do not expire until 2012. We plan to continue to prudently deploy our balance sheet strength into our operations, and we will continue to make acquisitions as good opportunities arise. As I analyze the numbers for 2009, it is clear to me that it was the second best year we have ever had, second only to 2008. And when considered in light of the underlying conditions, Brian and the regional structure, but especially our local companies and their teams are fundamentally improving Comfort Systems USA. In 2010, we expect great opportunities to invest in existing operations and to add new operations. These investments will pay dividends for years to come.

That's all I have on financial. So I will introduce Brian Lane, our Chief Operating Officer. Brian?

Thanks, Bill. Good morning everyone. From my point of view, the highlights of our full-year results were the achievement of a operating income of 5% of revenue, and the generation of free cash flow of $46 million.

I would like to thank all of our team members for their efforts this quarter and for all of 2009. These results represent our second strongest annual performance since 1999. We truly have a remarkable group of very talented individuals, and they are the foundation of our success.

We continue to 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 close several projects strongly. Our strongest financial performances were achieved by Hess Mechanical, SI Goldman, Comfort Systems Syracuse, Riddleberger and North American Mechanical.

In 2009, we increased the percentage of our work in existing buildings to match our highest levels ever. This was key to maintaining our profitability. We accomplished this by continuing to focus on profitably growing our maintenance agreement base and improving operational efficiencies. This year, we will further bolster our service sales efforts.

We also continue to increase our participation in projects that are related too improved energy efficiency and are performing numerous projects that will qualify for lead certification.

Safety continues to be a key strength of our Company. And our OSHA recordable rate remains 49% below the industry average and continues to improve. This is outstanding and, again, is the result of a continuing focus by each of our operations.

Our backlog, while still at solid levels by historic standards has been declining. Same-store backlog at the end of Q4 was down 6% sequentially and 30% year on year. The decrease in the fourth quarter is mainly related to our Maryland, Colorado, Florida panhandle and upstate New York operations. On an encouraging note though, after two years of weakness in Arizona, our backlog there increased moderately this quarter. Backlog also increased at our Virginia operations, which benefited -- benefited from booking a sizeable health care project.

We continue our efforts to find the more active sectors in the market, government, health care, education and through increased the proportion of our work that is in the institutional sector. Our pipeline remains very active and we have had a number of good bookings January, especially in the northeast, southeast, and Arizona. In particular, we were recently awarded a multimillion dollars hospital project in Wisconsin and a baseball spring training facility in Arizona.

As we said last quarter, we continue to see softness in the west despite early signs of improvement in the California and Arizona markets. The northeast and southeast also 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 nonresidential activity will continue over the next nine to 12 months. We have been actively addressing these challenges to minimize the negative effects of a continued downturn. We have been diligent in our cost reductions and our current operations are much more efficient than they were during the last downturn.

Currently, a same-store head count is down 4% sequentially and 14% year on year. Additionally, SG&A costs are down $12 million on a year on year basis, a 7% decrease and we continue to monitor our costs to ensure we have the appropriate level of SG&A costs in light of our revenue projections.

We are positioned to improve our competitive position in our various markets. We have made strong acquisitions during the past -- during the past few months adding Acorn Industrial in Raleigh, North Carolina and Dillingham and Smith in Nashville, Tennessee. ACORN has completed many sophisticated projects in the research triangle area for many years, and as a well respected contractor in the Raleigh area. Dillingham and Smith brings strong process expertise and customer relationships in middle Tennessee and is an excellent service company.

We have also added smaller operations to existing Comfort Systems companies in Kentucky, Montana, and upstate New York. I am thrilled to add these companies to our team. We will continue to get stronger as we prudently add more companies in the coming quarters. Also, we are making strategic investments in service and training. Our strong financial position and bargaining capacity remain a competitive advantage and we're 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. And we remain committed to project execution, cash discipline and cost control.

Again, I would like to thank all of our more than 5,000 team members for a great year. I will now turn it back over to Bill. Thank you.

Thank you, Brian, and Bill. As Bill and Brian mentioned, we continue our close attention to expense control and cost reduction. And our very diligent and expert work force has increased productivity in the challenging -- on some of the last year. With these demonstrated efficiencies, we believe we're well positioned to convert available work into profitable work going forward. And we are easily capable of increased activity. And we're starting to see some early indications of that, but I think we're also recognizing that recovery will be slow. But as activity moves forward and accelerates, Comfort Systems will be ready.

I think we ought to turn this over to Chanelle here for questions and hopefully, we will have some answers.

Thank you. Ladies and gentlemen, if you wish to ask a question please key star one on your touch tone telephone. If your question has been answered or you would like to have your question be removed please key star two. Again, to ask a question, it is star one. Please make your selection now. Your first question is from the line of Rich Sadowsky with Sidoti & Company.

Thanks. Good morning.

Good morning.

Hi, Rich.

By my math, the Atlas accruals cost you $0.04 in earnings in the December quarter? Is that right?

I think that is a fair analysis. We did actually settle some things and pick up money on some other Atlas accruals but net, there was a definite cost and near that magnitude.

Okay. Did the Atlas back log fall in December versus September or has that process run its course?

That process has run its course. Atlas is now a $20, $25 million company. Very small.

Okay. Your SG&A dollars have kind of stabilized in that low $40 million range. Is that as low as they go or was there some froth in 2009 from operating companies still hitting their targets?

They will go lower for sure. Because there were still substantially bonus payments this year.

Many of our companies did. Like I said, it was our second best year ever. Now, I'm actually hoping they don't go lower because I'm hoping the companies outperform this year and we're surprised by having to pay a lot of bonuses. But assuming this is a down year, I think you will see bonuses down considerably.

Okay.

That is one example of SG&A reductions. You know, there will be others but they will be more, you know, market-by-market. There are certain markets suffering more than others.

Okay. And --

Rich, this is Bill Murdy. You know, we're not implementing any across-the-board SG&A type cuts. We take this on an individual operations basis.

And we have got operations that are -- have backlogs as high as they have ever had and are operating as well as they have ever operated. So, we don't have any plans from here, to -- across the board cut SG&A, but there will be selective SG&A reductions in accord with available activity.

Okay. You're replacing the cyclical manufacturing and office work with government and education as would be expected this point in the cycle.

With that shift in mind, I would like to figure out why your margins in 2010 and maybe even 2011, even if lower than what you reported this year, would be a good deal higher than what you did at the bottom of last cycle. Is it only your own internal execution improvement or are these different contracts you're going after or there is a difference in the competitive pressure? I mean, is there something external that has changed as well?

It -- I will try to answer. I think most of the answer is that it is just our execution, taking on an overall basis, right? In the last downturn, we simply weren't the company we are today.

We had a lot of negatives offsetting some positives. We think we have cleaned up the negatives and retained the positives. There is a mild shift in the way public sector work is done today.

I'm talking US government work. It -- there is even designed build work for the US government. Not all hard bid work. And there are changes to bar the federal acquisitions regulations which allow some greater flexibility and indeed, relate to slightly better margins in that work.

If it is correctly done. But I think most of it, Rich, is internal improvements, which basically are productivity improvements in the company.

Rich, you will also remember, you were around when we had these calls back then. We used to talk a lot about our loss companies. We had companies we were shutting down.

We had some, you know, some situations where we would sort of regularly report statistics on that and those statistics are absent now and they're an important part of -- you know, if I pulled binders off the shelf in my office they are a very important part in the difference in that math and they are a very sort of measurable and reliable part of that difference.

Okay, thank you.

Your next question comes from the line of Adam Seilheimer, BB&T Capital Markets.

Good morning, guys.

Good morning.

Would you say, you know in the weak spot, the commercial lodging and office, do you think -- would you say trends there are getting worse, better, or kind of bouncing along the bottom?

Well, I would like to say that they were bouncing along the bottom. But I'm not sure that I can say that.

I think they there may be in 2010, from what we look at, try to access, I think the lodging weakness continues, and even gets worse. Commercial is not getting any better and we don't know the true impact yet, of what is going to happen, as commercial real estate attempts to get refinanced. That will have a diminishing affect on new development.

Office, we see vacancy rates in most markets at highs, so there is a lot of absorption of existing real estate. So, It's just hard to be positive, in the short run, year in the commercial lodging and office sector.

Now beyond 2010, you get into some fundamental thinking here, and it's bound to recover. So, I guess the net is I can't -- I don't think we -- finding the bottom in those sectors. But it's pretty grim.

On the flip side you have done a good job of offsetting that with, you know, winning more public work and quasi public work, and we think that will continue in '10?

Yes. This is Brian. We have a clear focus on penetrating the public market and we believe that will continue this year and next year.

And I think our early orientation on energy efficiency is helping us there because, all of these areas, schools, hospitals, and especially US government and military are very focused on energy efficiency. And we make that a part of everything we do.

Okay. And then, can you give us any kind of sense for the, you know, you said you continue to find new opportunities with good margins. I mean, what -- can you give us a sense for what the margin is on new contracts, kind of versus the margin you put up in '09?

Bill, do you want --

I think certainly -- they are certainly being loaded with lower gross margins and I think that's a reflection of pricing. So new work -- obviously -- we have a book of work at any given moment in time.

We're doing work that was priced at a lot of different moments. A lot of different times. But certainly right now there is pricing pressure, in most of our non-- the nonservice parts of our market. So, we certainly are taking work at lower cost. Now, the outcome of that, Bill alluded to some of this in his call was we also have lower costs ourselves.

We have ability to apply -- because we're shrinking our workforce we're applying the most productive part of our workforce, the most logical part of our workforce to a lot of that work. So that doesn't mean we give up on striving for the same kind of margins that we have been getting but at the end of the day, you can build a building cheaper today.

Okay. Well, thanks for taking my questions, and congratulations on a good quarter.

Thanks.

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

Hi, good morning.

Hey, John.

Now, I apologize if I missed this -- Bill, did you say what acquisitions added in the quarter?

Acquisitions didn't add anything in the quarter. The two acquisitions that we closed, we closed on December 31st and we closed a third on the first business day of January.

So they showed up in the balance sheet. We got $27 million in our backlog from those acquisitions, but nothing. Nothing in --

So the organic growth was negative 22%?

Yeah. It -- what you see is exactly all organic.

Okay. And then secondly, in terms of the margins and you touched on this a little bit looking out, on 2010, 2011, and beyond, the improvement that you have seen -- and I understand the businesses that have come out the mix.

If we start to ramp back up, is it -- do margins stay at this level? Or do they initially come down. I don't know because of the pricing in the market? In other words, have we seen the full impact of the lower pricing on --

I don't know about -- I don't know about down because I don't know at what moment that happens. But I think that you will see a pattern that you have always seen in our sector, which is, when everybody else starts to do better, we trail that a little bit.

We lag that a little bit. And it is not infrequent, when -- if backlog starts to build quickly, we have had circumstances in the past where it -- it did put downward pressure on our margins. For example.

Yeah.

In the first quarter of 2005, we had very low activity levels overall. And we had a busy summer coming up.

And at that point, it is a lot harder to make the decision to size your, you know, to sort of size your company to small when you know you're about to get big. In fact, frankly you know you're about to have a busy summer you have to gear up for it to some extent. And so, you know, our worst quarter in probably eight or nine years was that first quarter of 2005. And yet 2005, was our first turn-around year overall.

So one of the interesting things that can happen is if you, particularly if you have a little bit quicker return to booking backlog, you can -- it can actually hurt your margins for a quarter or two. A good time to buy the stock, though.

Okay. And the uptick that we're seeing in -- in bookings right now, I mean, at least relative to the last couple of quarters, is that an -- Bill Murdy, provide some sort of optimism in your comments. Is that what it is based on?

Well, I don't want to project too much optimism. It is pretty negative talking about commercial and lodging there, we are getting some booking there is no doubt about it. Some of it has been big projects which have, you know, a substantial affect on a backlog of our size in terms of percentage.

I don't know if it is optimism. I happen to think that -- and I think the majority do, that there is a recovery coming. It may have started. But it is going to be very slow. Very slow. And we're subject to a lot of competitive pressures here.

To include developers who now have recognized that they ought to be paying less for getting things done. And so that pressure comes from them. Pressure comes from competitive, you know, our competitors. I mean, one is near to the other but I don't thing I'm -- I'm just realistic here. I don't think that the recovery comes very quickly. I don't see a catalyst for a quick recovery. I see a recovery. But it is slow.

Okay. As a guy who stares at numbers it is always good to see that the percentage decrease your backlog is smaller than the percentage decrease your revenue. So I would agree with you that that's a good trend. The problem is of course one quarter in our industry and I'll always take a better quarter over a worse quarter. But one quarter is just one quarter.

Okay. Yes. I just wanted a little more color on that.

Good point.

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

Thank you. Good morning, guys. Bill George, I think in one of the previous questions you mentioned your book and pipeline and that obviously there were projects that are priced at different times. How much risk do we have that some of these older projects are repriced at lower rates?

I think we have very little risk that older projects get repriced. So, I'm not particularly worried about that.

We, you know, we have had one instance of somebody trying to do that and we walked away from the job and it turned out well for us in that case. The, you know, at the end of the day, these are their contracts. I mean, they are binding contracts. We have already mobilized for months and months and spent a lot of money and there is really no way for them to reprice them as a general matter.

Okay. And any color in just obviously the pricing environment is challenging. But any color on the service side, the pricing in that area?

This is Brian. On the service side of the business, we have not seen in margin compression we have seen in construction. Has decreased slightly, but it -- it is relatively holding its own right now, Clint.

Okay. And then I guess it is finally a couple of modeling related questions here. On the bonuses -- I mean, any rough idea of the call it $160 million in SG&A you had for the rest of the year. How much of that was bonus related?

All -- well, it is a hard question to answer. Talking above the productivity bonus level. I mean, we have levels all the way down to -- many of our crew's share savings on productivity and stuff.

It is very hard to get your hands on numbers like that. But if you were to take levels starting there and up it might be something like 10% of SG&A overall. I think that is a fair but rough guess and very dependent on where you start to draw the line because our industry like variable compensation at every level of the organization.

Because we're a, you know, we have a cyclical component to our industry and you love to be able to, you know, people who work in this industry they expect to make good money and you need them to make good money when times are good so you can keep them. But they understand they make less money in tougher times.

Uh-huh. And then last question. The effective tax rate that we should be thinking about for 2010?

I would say it is the same. I would say we're looking probably at, you know, 38% to 40%, unless we get some help.

Okay. Great. Thanks, guys.

Thank you, Clint.

Your next question comes from the line of Tahira Afzal of KeyBanc

Good morning, gentlemen, and nice quarter given the circumstances.

Thanks.

Thanks.

You know, as I look at the quarter, I guess the one thing I would love to get a little more color on is that you mentioned that Arizona was getting a little better.

Would love to get a sense whether you think this is a fundamental improvement, and what typically are the early signs of a sustainable improvement that we should be looking out for?

Wow. First of all, the Arizona improvement is certainly subject to this one fairly substantial job for the Arizona Diamondback football -- or baseball team. I -- it's very hard to talk about the trend and environment like this where -- so choppy. I -- I don't know, Bill do you want to --

If there was an example -- if there was an example of a place that I would be unwilling to call an end to the recession, Phoenix would be at the top of that list, probably.

Okay. Got it. So, I mean, you're still a little more positive than, you know, the southeast and the northeast and really supporting things into 2011 and perhaps in 2011 we start seeing some of your more west oriented markets starting to ramp up. Perhaps outperforms the northeast and southeast, which might have been a little more stable through the whole cycle?

That makes great sense. And we certainly would love to see it. But -- and it does actually -- it makes the most sense.

If you look at historical patterns, trends, what usually happens, this is a really uncertain time. What -- probably the pattern you described is inevitable.

The only question is when. The timing you're citing probably would be a consensus among the people who scratch their head about stuff like that.

Just aside from some endemic things, the northeast has a very substantial heating load as well as an air conditioning load. It has a very substantial service component, based on the fact that generally the installation and the equipment are older.

Right.

Older systems in that part of the country. In the southeast, which we like a lot, and are focusing on, obviously with the acquisitions in Nashville and Raleigh being witness to that, we like the business climate.

Those factors are all in there. I think Bill said it. It is logical to assume that the area of the country that has taken the biggest dive may show the greatest return at least on a percentage basis. In the future.

Got it. Okay. And, as I look at the activity in a -- over the last summer, and I know summer was mild in the northeast last year, did that impact some of the maintenance work you might have seen last year? And, you know, assuming a more normalized summer, could you potentially see some of this deferred maintenance work coming back?

Tahira, this is Brian. Absolutely the cool summer hurt us in the northeast last year. We're hoping for a sweltering -- with how much snow they had this winter that would help summer maintenance.

A lot of people just didn't bother doing the repairs because we didn't put the strain on the equipment that we have in past summers. So a lot will depend on what kind of climate we have coming through the northeast this summer for sure.

All right. Okay. So -- and so that should basically help you on some of the walk-in work that might have been light over the last few quarters?

Yes.

Got it. Okay. And then, last question, in regards to, you know, the strong winter that you have seen has that impacted or slowed down activity really pushed it a bit out of the fourth quarter and number two, I know you guys saw some snow down in Dallas and, you know, there were some issues over there.

Should we assume that impact some of your operations, you know, in the Atlas side there?

Yeah, without a doubt, the weather that has paraded through the country in the month of February has pushed our work -- made it more difficult to get the job sites and, et cetera,. It will push some of the work out to the second and third quarter. You are correct.

Okay. Great. And then, last question. You know, I did sense that you're a little more excited on acquisitions.

And I know it seems like, you know, prudently so you have been -- you've been very disciplined over the last couple of years, you know, buying at the disciplined multiples. So, as we look at 2010, are you seeing more compelling valuations and opportunities and is that making you incrementally more excited?

Yes. One, we're going to maintain our discipline and two, certainly some owners of private businesses are a little more willing to be realistic in valuations. But, unless they are ready to do something, ie, for age or estate purposes, or, et cetera, I don't think that's going to convince them to -- just the potential downturn, or downturn they are already seeing is going to convince them to sell.

And there have got to be other reasons there. It may push them over the line. But remember, we're looking for the good companies. We're not going to buy -- we're not into bringing in fixer uppers into Comfort Systems.

Right.

We're looking for the best companies in jurisdictions where we're not currently located. Or if we're going to bring on something where we are, it will be differentiated from what we're doing, in that location. But we're looking for quality. We're going to maintain our discipline. But, you're right. There is a more -- more discussions going on related to realistic valuations.

Got it, okay. And Bill, would be your main competition on, you know, these potential targets? Would it be, you know, similar in -- you know in sort of contractors around your size, or -- are you seeing any of the nonrelatively nontraditional equipment guys like Johnson's Control, and all, sort of also you know taking a look at some of these opportunities as well?

I think rarely do we see much competition at all. I mean, the reality is those guys are focused on, you know, markets that have similar labor characteristics to theirs. The guys, at least the manufacturers most of the time, and the reality is, the companies we want to buy have to fit with us culturally.

And it's people who didn't sell to private equity. You know, they've had opportunities in the past to sell to different financial buyers or sell to people who aren't good matches with them. And a lot of companies -- we talk to a lot of companies all the time. On average the companies we have bought we've talked to for typically more than a year and some of them have known for years and years and essentially I think we're a good match for a lot of those companies. When the time comes we get first and usually last look with awful lot of them.

Got it. Okay. Thank you very much. You know, I thought it was a relatively clean quarter and best of luck.

Thank you. Thank you.

Your next question comes from the line of David Yuschak of Madison Williams and Company.

Hey, guys. Happy Texas Independence Day.

Howdy.

Just a few things. In the quarter, was there much in the way of acquisition cost embedded in that SG&A, Bill?

Very little. You know, we do all of our legal work internally. We spend a little bit of money. Well, I consider it a lot, but on the scale you're talking about a little bit of money on valuation that's required nowadays, but we do almost everything, you know, with our staff of thousands here in Houston.

Good. So most of that SG&A was bonuses related over performance then?

Pretty much.

Okay. And then, as far as -- I'm just kind of curious, too, the unemployment rate in construction is about 25% or there abouts these days, and I guess go back to I think turn of the decade to get that kind of number again but -- I'm just kind of curious as you look at your work force, how much has it contracted and how much do you think you have in the way of capacity today, to do incremental work without having to go back into the labor force, to manage the recovery.

Well, I think right now we're -- we have been right sizing as we go along. We're down to about 5,600 odd folks now in total down from a peek of 7,200. So we're being very prudent about bringing people back as a starter. Trying to make sure the people we have keeping them busy as best we can.

But, we're down to a very productive labor force right now, so we're very comfortable with the team we have right now. You know, David to take on a little bit more work before we have to go out to the labor force.

So at this point in time, you're thinking because of what -- what you have been able to do with the productivity off of that -- just that recovery alone, could keep you in good shape for probably -- unless some seasonal reasons, in good shape for the rest of the year?

We think that's true.

Right. Normally we would build head count going into the summer. You might --

Right.

Yeah, a little bit but it won't be --

Less of that this year yeah.

That's why I was kind of curious as to how that stood because generally like you said in the past you have done seasonal training even in the first quarter to ramp that up. But you're thinking right now that labor force pretty much stays right around your totus for the year, last year?

Yes.

Okay. Now let me just talk about the markets you have been most successful education, government, health care.

Generally do those contracts, are they larger than your average and what kind of duration would you normally say, are they longer in duration as well? Give me some sense as to how much of an impact that can have because in looking at next 12 months you're indicating those are likely to continue to be the place where you can reach the most success.

I would say if you looked at -- you know, a I have a schedule I can pull out about this. Health care is either our largest or second largest average project size over a period of years. The largest actually is multifamily, which which sort of the decline in multifamily has lowered our average project size pretty significantly. And then the other two are very -- have very tip project sizes overall. So I would say that mixed book of business, has a slightly larger average project size.

One interesting thing that you see, in some of the government work, is not always, but sort of on a blended overall, it starts faster and because there is less financing issue, and there is less development issue. By the time those guys want to hire somebody, they are usually ready to work. And that's very beneficial at a time like this. It just so happens that that kind of work has really good -- a really good characteristic there.

So the -- the average project sizes, from education and government, is basically we typically see in your average mix then?

Yes, it is. Average construction --

But what you're saying is you get a faster start so you can -- would that mean then you get a faster start you could finish quicker then, too?

Well, faster start, yes and also it means it has less impact on your backlog because something that you -- that commits to and doesn't start for three or four months sits in your backlog until you get started.

So if you have a pipeline that is doing that, your backlog will be bigger for this same amount of revenue. So that's an interesting -- one of the reasons I'm aware of that trend is because I see what happens in our backlog. A lot of this work starts quickly so you start burning it off very, very quickly, and it is another one of the many ways in which our backlog, you know, has a poor -- has a poor mathematical correlation to what our revenues do. It's an important, you know, sort of leading indicator but it is a very, very dangerous statistic to start trying to do math with.

Now you have been very successful in education and government and health care over the last two or three years and you can see in the way of percentage of revenue and you mentioned earlier in your call that you're targets more of that. There is because of some of the success you seen not only from a percentage of business but an absolute basis. What kind of things are you doing there to lead to that success?

Well, a couple of things -- a couple of things we're doing. One is, we're able to extend our track record, that companies are doing and resources and any specialty skills we might need to other companies in our -- in our organization which is a real plus.

The other thing we're doing, we have a clear focus on the -- on the federal procurement side. We now have a GSA schedule, and we're very active -- we're going to have a gentleman who is going to have a main focus on the federal procurement business for all our organizations. So it is about three things, Dave, we're doing right now to enhance our presence in those sectors.

Okay. That's all I got for now. Good year, guys. Congratulations.

Thank you.

Your next question dollars the line of (Rich Wasalsky) of Sidoti and Company.

Thank you. We know you're going to be gunning for acquisitions in 2010, but you also mentioned some investments in your existing operating companies, which I take to mean you're going to render them as a able to process a higher service component. What exactly do you do, to a construction oriented company to gear them towards processing more maintenance business?

That's a great question.

And a difficult one.

It is a difficult process but we're getting there.

The real advantage we have is in our operations. You can show people the advantages they have of enhancing their service component. They will support, you know, and endorse, you know, the program that we have. We provide them help corporately with three individuals with vast knowledge of the service business that that go into these companies. And work to get them up to speed on whether it is acquisitions or selling.

We're also enhancing our -- the big focus we have on investments is on the sales side of the business and bringing in some rainmakers, for lack of a better term, to help us with solution based sales and service component energy side of business and we also have the energy and our service businesses as working closer together. So, it's day-to-day, working with them, and -- and getting them to see the benefits of the service, which we're there now actually with this, you know, enhancing in all of our organizations.

In some instances, Rich, we're not going to try to create what we called a you full service mechanical. We -- we have two very notable operations, that are construction only. They are two of our most successful operations.

We have in -- one instance, companies in the same area that do service. In the other, we're looking to have enhanced service capability available. So, going to do it where it makes real sense. But we're not going to challenge the culture of a big construction only successful operation. Just because it looks nice to have every company be a full service mechanical.

Is -- is that a change that the company's typically resist kind of upsetting the business as usual?

Well, no , no. The companies I just alluded to would resist it because They have been so successful as construction only operations. The others, where there is some activity, in the service or small projects area, look at the extravagant success of many of our full service mechanicals, and they get convinced that that's a way that they ought to

Great, thanks again.

You have a follow-up from the line of Adam Seilheimer of BB&T Capital Markets.

Thanks, guys. Yes, I'm curious. I know you don't give guidance, but I'm just looking at the current range of analysts estimates at the end of the year. You know, at a low end at $0.49. High end at $0.76. I mean, is that range generally in line with your internal projections?

You know, if we revealed our internal --

Nice try, Adam.

If we revealed our internal projections they wouldn't help you very much because there is a big range of what we could do.

You know, the guidance we give is directional, and we, you know, the guidance we give is that we will be solidly profitable this year and -- but not as profitable -- we don't expect to be as profitable in 2010 as we were in 2009.

I will say our analysts know us pretty well. But I think they know us well enough to know there is a big range of what can happen. But they also I think know us well enough to know that we run our business well and over time we flow cash, we don't waste it and sooner or later, that turns out well.

Okay. Well, thanks for that additional color.

Thank you.

Thanks.

That concludes the Q & A session. I will now like to urn the call back over to Mr. Bill Murdy for closing remarks.

Thank you all for attending this call and we look forward to another session three months from now. Thank you!

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.