Comfort Systems USA Inc (FIX) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2010 Comfort Systems USA earnings conference call.

My name is Crystal and I will be your Operator for today. At this time all participants are in listen-only mode. Later we will conduct a question and answer session. If at any time you require Operator assistance please press * followed by 0 and we will be happy to assist you. As a reminder, today's conference is being recorded.

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

Thanks Crystal. 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 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 most recent annual report on Form 10-K as well as in our press release that covered these earnings.

On our call with me this morning are Bill Murdy, Comfort Systems USA's CEO and Brian Lane, our President and Chief Operating Officer and Bill Murdy will open our remarks.

Thanks Bill. Uncharacteristically, we have been putting out a number of news releases about the Company, if you've been following Comfort Systems. We announced recently a new bank agreement and then very importantly, the acquisition of ColonialWebb headquartered in Richmond and Norfolk, which we are very, very happy about and very happy to have them now as a part of Comfort Systems.

We announced this write-off of non-cash intangible goodwill and now we are announcing our second quarter earnings. With apologies to NPR All Things Considered, we are reporting what we are deeming "reasonable" results for Q2 and Bill and Brian will have a lot more to say on the details especially relating to the numbers, in those results. Suffice to say we're not particularly pleased in the absolute with these results but given the steep two year decline in the economy and the fact that we operate in the non-residential construction sector which always lags any recovery, given that, we feel reasonably good about the results that we're reporting here.

Looking forward, on the construction side our backlog seems to have reached a stable level while considerably down from where it was two years ago and even a year ago. We feel, we honestly feel we will get more than our proportionate share of available work going forward out there, especially with operations like ColonialWebb as part of our constellation of operations.

On the service side we're very pleased with the progress there. A lot of people have already asked us if the weather is a factor in our service operations and the answer is yes. The fact though is that the weather didn't start really hitting until July which as you know, was not part of Q2 but July and early August here we're experiencing some record weather virtually all over the country which will affect our service operations.

I'd like to turn this over to Bill to embroider on the numbers here.

Thanks Bill. Because there are a few extra moving pieces this quarter, this morning I may be somewhat repetitive of Bill and recent press releases and filings. I'm going to comment on our ongoing results and then I will give some additional information about the acquisition of ColonialWebb.

As Bill noted, we continue to experience the effects of a challenging environment. Revenue decreased by $51 million in the quarter as compared to the second quarter of 2009 and same store revenues decreased by $58 million from a year early or 19% as acquisitions contributed an incremental $7 million in revenue.

The declines were broad based although they were somewhat steeper in the west as compared to other parts of the country. Also of note, institutional work continues to grow as a proportion of our work and was the source of well over 50% of our revenues this quarter.

Gross profit declined in the quarter, dropping from 19.4% in the second quarter of 2009 to 16.8% this quarter. Operating income margins excluding the goodwill impairment although down remained solidly positive, coming in at 2.7% for the second quarter.

During the quarter we wrote off acquisition goodwill in an amount that turned out to be approximately $4.4 million and relating to a business we purchased in 2008. When we buy a company, the price we pay that exceeds the value of other tangible and intangible assets is recorded as goodwill and under GAAP we are required to regularly test our goodwill balances to determine if recent and projected cash flows, viewed in light of other valuation considerations such as market multiples, support the original asset value.

Because the construction industry is cyclical and results can vary based on geography and individual company considerations and circumstances, from time to time we incur non-cash charges similar to the one we recorded this quarter. These non-cash charges reduce our earnings per share in the quarter in which they are booked and this quarter our after tax earnings per share were lower by $0.07 as a result of our impairment. After giving effect to the $0.07 per share non-cash reduction, our EPS for the quarter was $0.04.

Since last quarter our backlog decreased slightly, declining by $18 million or 3.5%. That comparison is a valid same store comparison. The year over year decrease in backlog was $133 million and on a same store basis the year over year decline in backlog was $151 million. This backlog decline has occurred disproportionately at our larger and more urban operating locations but despite this decrease and in light of the recession, our overall backlog remains strong by historical standards.

SG&A expense decreased by $5.7 million or by 13.7% as compared to the second quarter of 2009 but due to our lower revenues, SG&A actually increased as a percentage of revenues. The sharp dollar decrease in SG&A primarily results from our efforts to maintain disciplined cost structures during slow markets and a decline in variable overhead costs such as bonus compensation.

Our tax rate for the quarter was a little lower than usual at 23.8% and this was due to a discrete item of about $300,000.00. We continue to expect a full year tax rate in the usual 37% to 40% range.

Our stock repurchase program was modest this quarter as we purchased 134,000 shares early in the quarter. Since our program began less than three years ago we have repurchased 4.7 million shares and returned a total of $53 million to shareholders. As a result of these purchases we have reclaimed shares equal to over 11% of our current share base.

I'm now going to spend a few minutes talking about the purchase of ColonialWebb. The purchase price was approximately $58 million in cash and $24 million in notes with this price being subject to a working capital adjustment that will take place in the next few months. We also agreed that over the next four years, the sellers of ColonialWebb will receive an earnout or contingent consideration which will be a declining percentage of operating income above a minimum threshold amount. Overall, we believe that the price we paid was well within the valuation multiples that we have discussed in the past and have paid for other recent acquisitions.

Let me give you a little bit of information about how ColonialWebb will integrate into our existing numbers. ColonialWebb was acquired at the end of July and since it is expected to realize annual revenue initially at $180 million to $190 million per year, it will have a noticeable impact on revenues even in the third quarter. We believe it will contribute EBITDA and gross margin in proportion to its size at rates generally comparable to Comfort as a whole. As we've mentioned, because of the need to amortize intangibles we do not expect material earnings per share accretion for the first 12 to 18 months. However, we have not competed valuing the intangibles and this conclusion is based on estimates and comparisons to recent transactions that we have completed.

ColonialWebb has just over $100 million in existing backlog and has a strong record of cash flow. Once again, these variables are approximately proportionate to Comfort as a whole. As we did our due diligence it was striking to me that on almost every line of the financial statements, ColonialWebb is quite similar to Comfort Systems. Over-billings, collection statistics, inventory, fixed assets, are just a few examples of items that were highly comparable. Because of this I think it is reasonable to expect that the effect of adding this fine operation across our financials will be very proportional to the revenue numbers that I cited earlier.

The composition of ColonialWebb's revenues is also very similar to Comfort. Like Comfort Systems, ColonialWebb has a strong service operation with approximately $80 million of annual service, repair, and retrofit including more than $11 million in annual preventive maintenance agreements. It also brings a world class mechanical construction operation of roughly similar size and the company is rounded out by a remarkable and strong industrial refrigeration business that provides a nice additional capability in the southeast and should provide opportunity for synergies with existing operations.

Like Comfort, ColonialWebb is active in virtually all major end use markets and also like Comfort as a whole it is particularly strong in the institutional markets of government, healthcare, and education and always has been. Even after the acquisition of ColonialWebb, the Comfort Systems USA balance sheet remains rock solid. We continue to have significant cash and since ColonialWebb came with a solid balance sheet and strong assets including its headquarters building in Richmond, we have been strengthened across all of our asset classes.

Finally and also of note during the quarter, as announced previously we extended and increased our credit lines in July. As a result of this collaboration with our banks we feel that our already favorable covenants have become even more stable. Our new line will not expire until July of 2014 and that's a nice advantage in times like these. The deal with our banks will result in a small write-off of deferred debt costs in the third quarter which will be approximately $200,000.00.

So we will continue to seek additional ways to prudently use our balance sheet to grow and we remain convinced that with a strong balance sheet and the very best team of professionals in our industry, recently strengthened, we can continue to improve our position in the mechanical contracting industry during 2010 and well beyond.

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

Thanks Bill. Good morning everyone. We would like to thank each of our talented and dedicated team members for their efforts in a tough and challenging environment.

A great majority of our operations were profitable during the quarter. We are reporting net income from continuing operations of $1.6 million or $0.04 per diluted share compared to $10.4 million or $0.27 per diluted share for the second quarter of 2009.

The second quarter results for 2010 include a non-cash charge of $4.4 million or $0.07 per share related to an underperforming operation we purchased in 2008. This operation had an operating loss for the second quarter primarily due to job write-downs and severance accruals. We have hired a new President for this location and the projects that were written down are substantially complete.

The second quarter was also negatively impacted by job write-downs at two underperforming operations. In this tough market we are well aware that there is almost no room for error in bidding and executing projects. We have taken the immediate steps to turn around these two other operations.

I am pleased with the performance of the rest of our operations during the quarter. Our operating locations are much better managed today and the investments that we made in training, project management, and prefabrication, along with the leadership provided by our operating Company Presidents have allowed our companies to perform more efficiently compared to the last economic downturn.

Our service operations remain steady and have helped maintain our profitability. During the first half of 2010, pure service made up 17% of our revenues compared to 14% for the first half of 2009. We continued to invest in our service sales efforts and upgrade the quality of our sales force, most recently by adding a service Vice President to assist our southeast region.

Our focus on safety remains a key strength of our Company and our OSHA recordable rate remains 44% below the industry average. This outstanding result is thanks to a continuing focus by our operations.

Backlog at the end of Q2 was down 3% sequentially mainly at our southern California operation. We have seen some improvements in backlog at our Arkansas and Iowa entities and we are cautiously optimistic that our backlog levels are now stabilizing.

The institutional markets -- government, healthcare, education -- are active although private sector remains weak. Continuing the trend from 2009, over the last 12 months more than half our revenues were from institutional markets and today, 72% of our backlog is institutional work.

Our pipeline remains active and in July we have booked sizeable projects especially in the northeast and southeast. Overall, the northeast and southeast continue to be stable while softness continues in the west, although there are indication of signs of stability there.

We continued to see a lack of large project awards and we are experiencing pricing pressure as local and regional competitors respond to challenging conditions. However, we are committed to maintaining profitable margins.

We expect that weakness in non-residential building activity will continue for the remainder of the year. We continue to take steps to minimize the negative effects of a continued downturn. These steps include a tight focus on project selection, estimating, pricing, execution, and especially maintaining a disciplined cost structure.

Currently, our SG&A costs are down $5.7 million or 14% on a year on year basis. SG&A costs are down $1.8 million or 5% sequentially. Headcount is down 1% sequentially and 11% year on year. We continue to monitor our costs to ensure that we have the appropriate level of SG&A costs in light of our revenue projections.

We believe that we are positioning ourselves to improve our competitiveness in our various markets. Acquisitions remain a key strategic objective for Comfort Systems. Our recent acquisition of ColonialWebb strengthens our market position in the mid-Atlantic region and expands our service offerings in the area. We welcome ColonialWebb's employees to Comfort Systems and we look forward to building a strong and successful future together. I spent several days there last week at ColonialWebb and I am very optimistic about the strength and potential of their outstanding team.

Despite challenges, we have maintained our commitment to strategic investments in service and training. Our financial position and bonding capacity remain a competitive advantage and we are prepared for strong performance when our markets improve. I am confident in our ability to execute on our projects and continue to deliver solid operating results. Again, and more than anything I would like to thank all of our 5,400 team members for their efforts.

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

Thanks Brian. I think I'll wait to the end to wrap up completely here but I would like to say something. I think from Bill and Brian's comments you can get the sense that we continue to build and operate a Company here for the long term and importantly we are not bashful about taking action where necessary both in terms of taking advantage of circumstances and in a corrective sense in order to continue to operate the Company properly, profitably, productively and to build it for the future.

So with that, let me turn this over to Crystal for conducting a question and answer period. Crystal?

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Matt Duncan with Stephens. Please proceed.

Good morning guys.

Good morning Matt.

The first question I've got is as you look at your business, the various geographies and end markets that you serve, are you sensing that any of those could be bottoming at this point or are there potentially some headwinds that remain out there in the future?

Matt, I woke up this morning with CNBC at 6.00 am and they're talking about the same things, where, are we headed for a dip here? Are areas stabilizing? I think in a very general sense we think things are stable to slightly growing but until such time as decision makers get confident that things are stable and growing, they aren't going to make major capital decisions and that's what the lag in our business is all about. And then the consumer has got to come back to the market here and that drives a lot of things as you know. 70% of our economy is driven that way so -- we see the southeast certainly is, we're putting a lot of effort into the southeast obviously. We see that probably as the most positive area of the country but I don't know Bill, do you want to add anything to that? It's hard to get a complete picture.

It's a very, very interesting market right now. If you read, McGraw-Hill just recently released new numbers and they brought down 2010 by six additional percentage points and took a few percentage points off of next year and then they have strong 20 plus percent growth for a couple years after that so that's a big change for them in a month or two. Clearly, they're scratching their heads pretty hard and those guys spend a lot of time pulling permits and you know, they've got 50 people running around trying to sort this out. I think it's a hard moment to make that call.

That being said, we seem to be certainly at the bottom and things can stabilize even at the bottom so I think there is, there is at least a little better atmospherics out there.

Okay, that's helpful. Then a couple of questions on margins -- as you look at the gross margin that you guys put up this quarter, it's fairly similar to the one before it. Should we expect that to probably continue for the remainder of this year with the biggest variable there being it sounds like this quarter, the third quarter is off to a particularly good start from a service perspective which tends to be higher margin. So I guess what I'm getting at is from a construction standpoint, are the margins in your backlog fairly similar to what you've been reporting?

I think the answer to that is clearly yes. The only wildcard is like you said, the weather on the service side will have an effect for some period of time early in the third quarter but there's not improved pricing coming in through our backlog at the moment.

Okay, and then on the SG&A costs, you guys were able to take that down another $1.8 million sequentially but revenues were up. I'm curious what types of costs you were cutting there and is there any remaining low hanging fruit from an SG&A cost perspective?

Numerically there are three categories to the decline. One is fewer people, fewer -- and certain other kinds of costs although costs in our business primarily are people and so unfortunately there has been a negative change there across our operations.

The other two categories that make up that decline are bad debt expense which has gotten better, somewhat proportionate to revenues but because GAAP forces that through the SG&A line, that had about a $1.5 million effect on it and then there's just much, much lower -- in this industry an awful lot of compensation, especially for leaders, is based on incentives and those naturally come down. It's the way you have to run a cyclical business.

Okay, and then the last thing I've got here is with regard to ColonialWebb. I'm just trying to get a sense sort of what the multiple that you guys paid for that business was. Based on your commentary that it's a $180 million to a $190 million revenue business for the next 12 months, running at fairly similar margins to what you guys are putting up, that would imply an EBITDA number of probably $8 million to $9 million for that business so it looks like you paid about ten times on a forward EBITDA basis. A, am I doing that math right? And B, if that's the case, why did you guys feel comfortable paying up for this one a little bit?

The answer to A is no.

Okay.

And the answer to B is we're still very -- whatever multiple we paid for this, and I'll come back to that in a second, we're very, very comfortable with ColonialWebb's position, its professionalism, its ability to get more than its proportionate share of available work, etcetera.

On the question of multiples, we just -- while you could do some math that might increase the multiple beyond the reasonable for the very short term, it's not how we're bringing companies into Comfort Systems. We're trying to understand what they've done in the past, what they will do in the future, what the stabilized power of that company is in terms of producing a bottom line and cash flow and then we pay a multiple times that and the multiple that was paid for ColonialWebb -- and I think it's reasonable for them to not necessarily want that to be disclosed -- was very reasonable relative our own acquisitions in the past, or in the recent past, and the industry, Matt. It's just we don't pay nine times earnings.

Bill, I understand for competitive reasons you guys probably want to be careful around this discussion. I'm just trying to get a sense how much that business may be down to help me get a feel for sort of in the mid cycle world what type of earnings power ColonialWebb can contribute to Comfort Systems -- is really what I'm getting at here.

If you looked at a long period of time, if you looked at this Company over a long period of time you would see generally $200 million in revenues at sort of over the cycle margins that are similar to what we aspire to, 6%, 7% EBITDA margins, so -- and if you do that, you get to the kind of multiples that we talk about. If you look at the multiple of 2008, we bought it for two, three times right? It's a cyclical business and we would get into trouble very, very quickly if we didn't view multiples on a ten year average basis, over the business cycle basis.

And Matt, importantly -- I know you didn't ask this question but Bill pointed it out in his remarks. This is a large company, an important "transformative." Also, we have a balance sheet there that we bought. We're very careful about that, so -- and then the currency we paid was not all cash. There is some debt and some earnout involved here so it's kind of -- you're asking a good question. I know what you're asking but while we can't describe exactly the demand and the numbers, we feel this is a very fair and good price and something that is accretive. It's certainly accretive at the operating line, immediately, after we amortize (multiple speakers)

Okay, thanks guys.

Okay, thanks Matt.

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

Hi, good morning gentlemen.

Good morning John.

Bill George, I just want to make sure that I've got a couple of numbers that you mentioned correct. $200,000.00 for deferred debt write-down in the third quarter. Is that what you said?

Right, and I mainly mentioned that because it's very small so that people don't wonder.

Okay, and are there any other significant acquisition charges that you expense in the quarter?

We did the entire legal of it in-house, only we got a little bit of expert advice for the low tens of thousands of dollars. We didn't employ a broker so I'd say it's under $100,000.00. We're pretty frugal, John.

Okay, alright so no meaningful impact it sounds like.

No.

Okay and then secondly, I don't know if it was Brian or Bill but you were talking about backlog. You're feeling better about it and that it's stable here and I appreciate that but I'm looking at a trend here of pretty much a continuous decline and I just want to understand a little more about what gives you that confidence.

John, this is Brian.

Yes.

I think we're cautious. I think we have a feeling it's stable but we're not trying to articulate any optimism here. We've had a good month of July in bookings which gives me a little bit more comfort but there's still a lot of work out there to bid. Margins are under pressure but we're not going to go to the sky in the near future. I'll say that.

And John, you should take it in context. This is a very, very special recession. A 30% decline in '09. We're headed towards almost a double digit decline now according to Dodge in '10 and we lag that all, so it's in context. Given the really once in a lifetime nature I think of the recession we're going through, we're liking what's happening. We're proving that we can make money and that we have very disciplined, very, very good execution teams out there and we really believe we're going to come out of this with an altered industry and an industry in which we're going to be more important.

Okay, I guess what I'm just trying to grapple with and I understand, I mean, and you're to be complimented for the profitability in the business, is I'm hoping that there is some light out here and I'm just (multiple speakers) what you guys are --

But John, John, John, do you really think we'd be the first ones to point it out if it were?

Okay and just again on backlog, the projects that you're seeing, are they noticeably different in size either because you've got more service work, smaller project work in response to heat waves or are you getting bigger government contracts that are going to extend out maybe longer time horizons than you've seen in the past? I'm just trying to (multiple speakers)

A combination of all of the above. Some of the government work we're bidding John, is of some size, no question about it. The work we're seeing right now as Bill George spoke about, a lot of weather related replacement, retrofit type work but the projects in general are smaller than we probably saw two years ago.

Okay, okay and then is it your sense that those are just people tiptoeing back into the market a little bit or is it --?

I'd say that's correct. As you know, a lot of maintenance and repair has not been done over the last few years and some of it has just caught up with people.

Okay and sorry, just last question. I think I ask you this, guys, irregularly, but is there anything new from either an equipment point of view or service requirements, regulatory, environmental requirements that are going to affect your business over the next say, 18 months?

No, nothing large, John. I mean, there is the continuing focus on energy efficiency.

Right.

Although as we have many times said, where there are low electric rates, people tend to have less focus on that but where there are high electric rates and where they're seeing huge consumption right now of electric energy to provide air conditioning especially in the southeast and in the east, there is a lot of focus upon energy efficiency.

Okay, okay, great. Thank you very much.

Sure, thanks.

And your next question comes from the line of Rich Wesolowski with Sidoti. Please proceed.

Thanks, good morning.

Hi Rich.

Are there one or two areas, sectors of your backlog that you could call out as exerting the biggest drag during the last couple of quarters and is there any reason to believe those sectors are approaching a level at which they can't hurt the backlog anymore as you look out to the second half and into 2011?

I don't know how much lower you could go in commercial office. It's just not going on. Hotels are weak. Retail -- well, the retail malls are non-existent. It can't go any lower unless you -- I guess there could be projects canceled but we don't have that many projects like that going on.

I mean, the math of some of those segments are, it's all stop kind of math in some of those segments.

How about this, that 72% of the backlog in the institutional or the publicly funded categories, is that higher than it was at the start of the year?

Yes.

And it'll continue to go higher for now.

Would you review what happened at the Delaware operation that prompted the project write-down and the goodwill write-down? Are there any similarities in that situation when compared with what you went through with Atlas and does it have the potential even to grow into a real problem?

I'll just mention the goodwill but let Brian address the operations. The goodwill, it's simply the math of discounting cash flows and you're not allowed to, you have to look at recent numbers and next year's number and then do a bunch of extrapolative math on that. I think we're still happy to have bought really I think the most significant mechanical player in Delaware so it's not that we didn't write it off because we wish we weren't there. We're still really committed to that company and market and we think we'll be happy to be there for decades to come. Brian, do you want to talk about that?

Yes Rich, on the operations end we had a couple of projects that were poorly bid and poorly executed unfortunately. They are substantially complete, but I think we are now ahead of the job curves -- job cost part of the game. We'll probably have a struggle to cover the overhead for the rest of the year because the margins are low in that sector of the business but I don't think it has any semblance to the long term issue we had at Atlas.

Okay and then lastly on ColonialWebb and their execution, how would you characterize that this far into the recession? Have they completed any headaches in their backlog or are there any projects that you have a special eye on?

We don't find out about those until they're done. We're done some very significant looking at what they're doing and we're happy with their execution, their potential execution. I think they, this is a very, very professional, disciplined company.

And when we did due diligence, we did due diligence, we brought some of our best people from across the country, sat with their team for days and they were very, very open about the good, the challenges and honestly in a company that size, it's like Comfort Systems. You get a certain amount of that. What happens in a recession is things that mathematically wouldn't rise to the surface in good times that aren't necessarily that crazy out of the ordinary, they just assume greater importance because of the math of small numbers. So I don't know, I just think they're a great company. They have a big, like us, like Comfort taken as a whole they have a large sampling of many, many projects and so things like, if the thing that happened at Delcard happened to them it wouldn't show up. It would be lost, blended into the mass.

Rich, we are very, very impressed with their operational capabilities, processes, and talent.

I'd like to add something to what Brian said about the Delcard thing and related to your comment about Atlas. The difference, one difference here is that we have taken immediate and decisive action. We have not allowed anything to continue in its past manner there and that's different from Atlas. We there, because the rest of the Company was doing so well, we sort of hoped for the best at Atlas and stayed too long on some things. Here, we've really made some decisive moves.

Appreciate it, thank you.

Your next question comes from the line of Adam Thalhimer with BB&T Capital Markets. Please proceed.

Good morning guys.

Hi Adam, how are you?

Good. I wanted to ask I guess a few questions here. Can you talk about trends in terms of the numbers of bidders you're seeing per project? Has that changed at all in the past couple quarters?

For the past couple of quarters the number of bidders have increased from the past two years but for the last few quarters it's been about the same.

Okay, I mean roughly where is that? Are you looking at eight, ten, 12? (multiple speakers)

It's all over. Some of the government work we're looking at there might be two and some other work there might be 20 so it's the full gamut of it, Adam, right now.

Okay, I kind of want to ask the inverse of a question that Rick asked -- or Rich asked -- but when we look at the in market verticals that are really good now, like government and hospitals, those entities are going to have to start tightening their belts at some point. Do those, does that worry you at all?

Sure, it worries us. We haven't seen that yet but it's logical to assume that school districts and hospitals and municipal, state, and even federal government starts cutting back or not growing as fast. We keep a good track on that. We're coming at the government business in an additional way and that's by partnering with firms that have an additional look at government work because of the way they are owned or who they are owned by and this is all within regulations. So we're getting a look at an awful lot of business and there it's pretty encouraging actually, the future work that looks like it's available there, federal work for sure, and there's an awful lot of hospital and schools and other institutional work out there that's being bid on. I drove by two sites this morning right here in Houston, between here and my home, where they're bulldozing schools and they're going to build new ones right there. So I don't know if we've got those projects but -- do you want to add anything to that, Brian?

Well, I think you're right, Bill.

Okay thanks for that and then just one final question maybe for Bill George is what are the swing factors we should think of -- you know, you expect free cash flow to turn if anything more positive in H2. What are the swing factors there, Bill?

Well, I think what's -- historically, if you look back five or six years and you don't look too, you discount a little bit the last year or two, our second quarter has typically been a turning quarter where we're done maybe $5 million to $9 million of free cash. $1 million was disappointing but probably not even a full standard deviation from the mean of what I expected. We typically flow most of our cash in the third and fourth quarter. It's a focus. We've got our work cut out for us but we really, if you look inside the statistics, the DSOs haven't budged. Our AR has gotten better. Our over 90s have gotten better. We've seen good movement on some persistent issues so we feel pretty good about it. I just think we'll do what we always do which is we'll cash flow our earnings. When earnings are less we cash flow less but we still cash flow our earnings.

Okay, thanks guys.

Thanks.

Thanks Adam.

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

Good morning gentlemen.

Good morning.

First, I wondered if you guys could provide a little bit of color on the $100 million in Colonial's backlog. I mean, just generally, any concentration issues or approximate contract sizes for that backlog?

I don't have very much specific information at my fingertips. I suspect they will slightly increase our average contract size once they come into our group just because their contract size is noticeably bigger than ours. They definitely -- I believe they have an even higher percentage of institutional work in their backlog than we do but apart from those two comparatives I think, I really think -- go back to what I said -- I think they're very, very proportional to us in so many ways and this is another one where I think you can just think of it as being more of the same.

Where are they Bill, percentage-wise on just maintenance revenue?

Well, they have $11 million in, over $11 million in preventative maintenance agreements. They have $80 million in total service which is repair, retrofit. It includes small and some medium sized projects, nothing large so they're very similar to us, frankly, particularly if you took out -- they have this really nice industrial refrigeration business, very, very high tech, very, very expert industrial refrigeration business. If you take that out, their pie chart looks like ours. You could pull our pie chart out and you'd have theirs.

I know you haven't completely finalized the valuation but just roughly how much amortization should this add to our numbers here?

I've got to say that is a real mystery to me right now. The valuation people, you saw my goodwill write-off move in three days, right? The valuation people are really hard to predict right now so what we are using, what I cited was just based on what we've seen in past deals but because the math includes so many variables including margin and backlog, it's possible our amortization will be less than their earnings, their after tax earnings, and we will get a little bit of accretion. It's just too soon to tell. I wish I could answer that question. Your guess, informed by what I just said, your guess is as good as mine.

Okay and Bill Murdy, you mentioned a few minutes ago that it was a transformative deal. I wondered what does this mean for possibly Riddleberger or any other obvious synergies for just the mid-Atlantic region as a whole?

A transformative, I've come to know that term as meaning anything that accretes revenue by more than 15% and that's certainly what this does but we are very, already prior to the acquisition and right now are working to ensure cooperation and collaboration among not only Riddleberger and ColonialWebb but other operations in that area. We think it is a net/net positive in terms of revenue accretion and indeed profitability so Brian, you may want to say something here too. You worked pretty hard on this.

Right. Yes, that we're -- as of, I think -- we finished a deal in the morning, and we were already working with a number of companies. We see a lot of revenue synergy throughout the southeast and quite frankly, probably across the whole country over time so we see a tremendous ability to leverage ColonialWebb's resources with the rest of our organization.

And mathematically, revenue overlap is very small, a couple percent. It just so happens we haven't been in Richmond and Norfolk and they are titanic in those markets and so you take that out, there's just very, very little, very, very little overlap mathematically, a lot of touching, a lot of edges touching each other but not a lot of overlap historically.

Okay great, and then last question here, just any other deals in the pipeline? I mean, does this mean given the size of Colonial that you guys are probably done for now?

No.

Right. We've continued, we think this is a good time in our industry to really go out and try to find special opportunities and we plan to continue.

But it's fair to say, there are no opportunities the size of ColonialWebb. What we're doing is focusing on, as we have over a long period of time, on high quality operations in jurisdictions where we are not currently represented and we certainly have a number of those that we can focus on.

Great, thanks guys.

Thanks.

Thanks.

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

Hi, this is Tahira. Most of my questions have been answered. Just wanted to ask a couple of questions -- number one, I know ColonialWebb used to be part of FirstEnergy. I would love to get a sense of how they really fitted into FirstEnergy. Does that really make them, does that mean they have capabilities to work with utility sponsors as well? Any insight you could provide there would be great.

Tahira, it's Bill. Clearly they didn't fit very well because FirstEnergy let them go a few years after buying them but sure, they have relationships that are very -- across the whole sector they're in they have good relationships but being part of a public utility is a whole different kettle of fish, if you will. I don't think there are any peculiar advantages relationship-wise but they have a -- ColonialWebb has a splendid reputation with everybody in the area and the fact that they went into and came out of FirstEnergy didn't spoil the relationship with FirstEnergy necessarily.

Got it, okay and the second question I had left is also to do with ColonialWebb. In terms of how you can actually take some of the capabilities ColonialWebb has, are their capabilities a little more broad based? Do you see some expansion of your own capabilities or some stretch where you can take some of the sponsors Colonial has and sort of expand your own organic base into those in other regions as well?

No, it -- I think Brian mentioned, the day we closed the deal they happened to be having an employee meeting where they had a lot of the leaders there and within hours there was a lot of work, collaboration being done, a lot of excitement, people on the phone with people all over the country. So the way it happens in this business, just with human beings connecting with human beings, and that takes a while but boy, it's off to a good start.

Absolutely.

Got it, okay. Thank you very much. That's all I had.

Thank you.

And your next question comes from the line of Terence McIver with Contract Bus. Please proceed.

Thanks. That's Contracting Business, HVACR publication. Don't mean to bore the financial experts there but just curious whether you think there's, or have you seen a change in lifestyle selling and payback analysis among building owners seeking perhaps faster paybacks rather than multiple year paybacks with new system installations?

During the recession, people demand much shorter paybacks when they're making decisions. That is for certain. It's just economically driven.

But there is interest in paybacks on the energy efficiency side. As Bill said, a recession cools a lot of that interest but this summer will be interesting as a laboratory for a lot of that in a sense of people are going to see much increased electric usage based on the fact that they're using their HVAC systems a lot more and it may be a boost to that.

Great. Johnson Controls recently released the findings of a survey in which in many cases, building owners were moving forward with certain energy efficiency programs but much of it had to do with lighting and other control systems apart from HVAC. Do you see more interest growing perhaps in HVAC related controls?

Yes. The lighting is the most obvious and candidly, the easiest thing to do but the next big step in saving electric energy is -- the only place to go is HVAC unless you want to throw out your plasma TVs and computer screens.

Right, and then finally I think it was Bill George mentioned that the industry is going to come out of all of this economic downturn altered. The word was "altered." What might you mean by that?

Essentially what I'm talking about is the -- two things -- the exiting of capacity and probably a speeding up of the shift towards higher technical content, the need to be more productive, the need to tie your shop to your computers and be just excellent at prefabrication. Just a number of trends come under a lot of pressure at a time like this and if you have the capital, the foresight, and the reason and will to make investments I think it can benefit you.

Thank you.

And your final question today is a follow up from Rich Wesolowski with Sidoti. Please proceed.

Hi, thanks. Bill George, you cited two numbers in the prepared remarks regarding ColonialWebb's service business -- $80 million for annual retrofit and $11 million for the recurring service base, if my notes are right. I assume the latter is analogous to the 17% of your business in service. Is that correct?

No, $11 million is analogous to our $50 million of preventive maintenance agreements so $80 million is analogous to our repair, service, and retrofit which is 52% of our revenues now.

$11 million is part of the $80 million.

$11 million is part of the $80 million and it's part of the 17% in our case -- I don't know the number in their case -- of sort of dispatched pure service but they have more dispatched in pure service than just the retrofit base. The $11 million is simply periodic contracts to go in and improve things.

So there's three levels. There's the maintenance based. There is pure service and then there is all service and the $11 million and $80 million are the maintenance based and the all service. I don't have a pure service number for them at my fingertips but once again think it would be proportional to ours. You can probably do the math on ours and get pretty close.

Okay, if we take the $7 million of acquired revenue for the June quarter and add $30 million for two months of ColonialWebb, is that the best expectation for acquired revenue in September?

Yes, I think ColonialWebb will annualize at about $15 million a month, a little more cyclic -- they are seasonal like we are, so you might want to apply a little seasonality to that, but that's probably close enough.

Okay and then last one, I assume the acquired backlog is the biggest category of the amortization. Does that run off as the backlog runs off or is that on a specific time?

You are normally true but that is the variable I was talking about when I said I have a hard time predicting this one. One of the things that is a huge mathematical determinant of the valuation of backlog is the margins in backlog and the margins in backlog are lower for any contracting company today than they were a year ago and so I would say in all but one of our acquisitions which interestingly enough is Delcard, historically backlog has been the biggest category but I'm not confident at all it'll be the biggest category this time but it's really too soon for me to say.

Okay but did the trade names in the customer list, they run off on a defined period but does the, generally the amortization of backlog run off with the contract pace?

Yes. Well, the amortization of backlog runs off over usually 12 to 24 months for a company this size, so it runs off much quicker and normally it's the biggest piece and so that's where you get most of your boom, your effect early on. Meanwhile, customer lists can be five, ten, 12 years. It runs off over a much longer period of time. Trade name for a company like this, I'm not sure we would amortize it. I think we're looking at that, we're doing research but I think we consider the ColonialWebb name to be a permanent asset. I'm not sure we would amortize that at all. I think we would keep it on the books forever because we plan to keep it around forever unless they tell us different.

Great, thank you. Thanks again.

Thanks.

Thanks.

Ladies and gentlemen that does conclude today's Q&A session. I would now like to turn the call back to Mr. Bill Murdy for closing comments.

I would just like to concluding by evidencing publicly the tremendous amount of work on the part of Bill George especially who led the acquisition of ColonialWebb and has handled some very interesting negotiations in that regard and also managed to lead the renegotiation of our bank lines and then the whole financial staff here with the normal quarter end work, especially some related to the non-cash write-down, write-down of non-cash goodwill. So I really want to recognize that publicly. Of course we had our operations people in this too. This truly, ColonialWebb is a landmark thing for us and we are very, very happy to have them part of Comfort.

So thank all of you and we will see you here three months from now. Thank you.

Thanks everyone.

Ladies and gentlemen that does conclude today's conference. Thank you for your participation. You may now disconnect and have a great day.