Comfort Systems USA Inc (FIX) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Comfort Systems USA Inc. earnings conference call. My name is Kendall, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

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

Thanks, Kendall. 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 will say today is based on the current plans and expectations of Comfort Systems USA. Those plans and expectations involve risks and uncertainties that could cause actual future activities and results of our operations to be materially different from those set forth in our comments.

You can read a more detailed listing and commentary concerning our specific risk factors in our Form 10-Q and our most recent 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 President and Chief Operating Officer. Bill Murdy will open our remarks today.

Thanks, Bill. Welcome, everyone. We're happy to report a profitable Q2 and $0.08 share versus the loss we reported in our first quarter. Revenues were up $30 million from the first quarter in our second quarter, and while that is, in part, attributable to the normal seasonal pattern that we have, it is also up $21 million from Q2 of 2010 on a same-store basis.

Quarterly revenue was at $312 million including our recent acquisitions and that's up $62 million from Q2 of 2011 -- excuse me -- $62 million from Q2 of 2010. So there's a bit more activity any way you want to count it.

Our backlog at June 30 was up a couple of million from backlog at March 31 and at $621 million at June 30, it is up 23%, including acquisitions, and 5% on a same-store basis from June 30, 2010. Further -- and I think Brian may have some more to say about this -- we are seeing some increased project activity and have a decent pipeline beyond our formal backlog.

However, before we get too carried away with positive indications, I'll note that there's been a recent decline in the Architect's Building Index, which is a reasonable precursor of future activity, as well as we've got concerns about public expenditure here. And these give us pause and concern about the continued recovery in the non-residential new construction sector.

Of course, Comfort Systems, more than half of our business is service -- that is maintenance, repair and retrofit of existing HVAC installations, and we continue to push hard toward more and more and more profitable service around the country, and we're seeing some progress there as Brian will comment on.

Our efforts in the energy efficiency arena continued, with some notable successes, and we sense, in a very general way, a growing positive awareness on the part of customers of the benefits of maintaining and/or retrofitting their facilities to garner the cost savings that the resulting energy efficiency provides.

As noted before, we're certainly growing slightly organically, but of course, we're also growing by acquisition and we continue discussions with a number of first-class currently private companies about becoming part of Comfort Systems. The value expectations on the part of these private entities, for the most part, seem to be reasonable.

At this point, let me turn the mic back over to our Executive Vice President and CFO, Bill George.

Thanks, Bill. We were profitable in the second quarter. We continue to be broadly impacted by the ongoing weakness in non-residential building markets. As expected, gross profit and operating income margins were generally lower due to continued challenging market conditions.

As compared to the second quarter of 2010, total revenue increased by $[63] million this quarter, primarily due to our acquisition of ColonialWebb. Without acquisitions, quarterly same-store revenues still increased significantly, rising by 8% compared with the second quarter of 2010 and this was our first same-store revenue increase since 2008.

Gross profit declined this quarter, dropping from 16.8% in the second quarter of 2010 to 15.2% this quarter. The decrease in gross margins was generally broad based, essentially reflecting weaker pricing overall.

Our backlog this quarter increased slightly from March 31 and we're reporting our first same-store year-over-year increase in several quarters. Since June 30, 2010, backlog has increased by $115 million, with most of the increase resulting from the acquisition of ColonialWebb in July 2010. However, even on a same-store basis, the year-over-year change in backlog was significant at nearly 5%. Overall backlog is flat to slightly up and the absolute levels remained solid by historical standards, especially in light of industry conditions.

Our SG&A expense increased to $6.3 million for the second quarter compared to the same period in 2010, but all of the increase was the result of acquisitions, and same-store SG&A, excluding amortization expense, decreased by $1.4 million or nearly 4%, which means SG&A also decreased as a percentage of revenues, dropping from 14.3% in 2010 to 13.4% in 2011.

The ColonialWebb acquisition added revenue of $42 million, but it resulted in an overall $0.7 million incremental operating loss for the quarter after including the amortization of intangible assets and other fair value adjustments.

Our tax rate for the quarter was 44.3% and is 37.1% for the first six months of 2001 (sic). Our effective tax rate is expected to be lower for 2011 compared to last year, mainly as a result of permanent differences generated from acquisition-related fair value adjustments.

Our stock repurchase program was active in the quarter, as we purchased 357,000 shares, and since we began buying shares in 2007, we have purchased 5.2 million shares and returned $58 million to our shareholders.

Cash flow for the second quarter was negative, as we continue to experience industry headwinds. We've generated positive free cash flow for the last 12 years and we are working to continue that streak. We expect to earn money for 2011 and we believe we can achieve positive cash flow for the full year.

Comfort Systems USA remains financially and operationally sound. Our balance sheet is still rock solid. Despite tough market conditions, we continue to search for and implement strategies to prudently use our strength to compete, improve and grow.

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

Thanks, Bill. Good morning, everyone. I first want to thank each of our dedicated team members for their strong efforts in this tough market. We are pleased to report solid results during the second quarter of 2011. We are encouraged by increased activity levels compared to 2010, as same-store revenues were up by more than 8%.

Our focus on project collection, estimating, pricing and execution, along with our disciplined cost structure, have allowed us to achieve good profitability for the second quarter. Despite continued recessionary conditions, substantially all of our operations executed work extremely well.

Our investment in service continues to pay off. We had strong results from service during the quarter. Pure service, which is maintenance and repair, was 18% of revenues for the first half of 2011, and we are achieving increased levels of profitability in the service business. We continue to invest in service sales efforts and this has translated into a steady maintenance space.

We are seeing good results from our investment in NG Services and expect this to be a key differentiator in the coming years. Currently, we are seeing a number of opportunities generated from our existing customer base.

Construction and large retrofit projects continue to experience recessionary conditions. Overall, Comfort's Northeastern operations remain stable, and the Northeast, together with certain markets in the Upper Midwest, are our most profitable geographies. The majority of our companies in this region, and most notably those in Michigan, Wisconsin, and New York continue to report solid results.

We have a strong market position in the Northeast, thanks to a combination of top-quality services and the ability to add value with competitive pricing. For example, we are currently working on a large pharmaceutical project in Upstate New York. We are working for a long-time customer and our proven experience with them helped us win this project.

Market conditions in the Southeast, and most notably in the MidAtlantic and Central Florida areas, continue to be impacted by weak pricing for non-residential construction. Our operation in Mobile, Alabama, was stable during the second quarter. The combination of this operation with a successful sister company in the Florida panhandle is proceeding very well and is the reason for improved results during the second quarter.

Softness continues in the West, although most Western markets have stabilized and a few are beginning to show some strength. During the second quarter, two of our operations in this region partnered to win a large project at the Houston Airport. This is a good example of our national footprint helping us win work that otherwise would have been unattainable.

We remain committed to safety. Thanks to a continued focus in operations, our OSHA recordable rate is 37% below the industry average.

Backlog at the end of the second quarter was 621 million, up 2 million from the first quarter. This represents the second quarterly increase in same-store backlog. On a same-store basis, the backlog was up 23 million, up 4.6% as compared to Q2 2010. The institutional markets of government, healthcare and education are active and comprise 71% of our backlog.

The private commercial sectors remain weak. We continued to see a lack of large project awards in tight bid [markets]. However, we are winning our fair share of work.

Overall, we remain cautiously optimistic that activity levels in most of our markets are stabilizing and may improve in the coming months. Industry forecasts are suggesting that as we approach 2012, we will experience gradual improvement in non-residential construction and we are optimistic that activity levels have begun to rise. Nevertheless, overall demand for construction is low and we continue to experience pricing pressure as the anticipated recovery has been slow to develop.

Our strong financial position and the bonding capacity remained a competitive advantage. Acquisitions remain a key strategic objective. Project execution remains a top priority. Overall, I feel confident in our ability to execute, preserve our capabilities and deliver positive operating results. Most importantly, we are ready for strong performance when the markets improve.

Again, I'd like to thank all of 6600 team members for their efforts. I'll now turn it back over to Bill for his wrap-up and then questions. Thank you.

The wrap-up comments are very short, summarizing some of the things that Bill and Brian have said. We're not sugar-coating any of this. It is what it is and we're in a tough non-residential construction economy, and by virtue of the fact that there's [new] work out there, it's very competitive. And as Brian said, we are well positioned, we're fiscally strong and very importantly, we count among our operators some of the best people in the country.

And we think we are actually taking some market share here and we remain confident of our future success, both based on our current operations and our ability and willingness to grow by prudent acquisition by bringing in some more top-notch operators.

At this point, that, I guess, is the completion of our formal remarks, and we'll throw it open to questions. Kendall?

(Operator Instructions). Your first question comes from the line of Adam Thalhimer with BB&T Capital Markets. Please proceed.

Hi, good morning, guys.

Good morning, Adam.

Good morning, Adam.

Good morning, Adam.

With -- you said 71% of your backlog is institutional, including federal. How worried should we be about federal spending cuts as it relates to your business?

At any given time, what -- the composition of our backlog doesn't always translate directly into the composition of our revenues. So that's the first thing I'd mentioned. Having said that, we're looking for strength in manufacturing and other areas of private to help us as government weakens. The biggest part of federal for us is military and that's see -- I don't see as much concern in that area. Bill has some unique insights into that.

Yes, I think, Adam, these cuts, defense cuts, and other federally funded cuts are going to come a lot more slowly than one would expect reading the top line of the media here. You get inside of this and these things are phased out in the future maybe be less of an impact than we thought, but I don't think -- it's not falling off a cliff, and so much of this is committed work on the federal side, especially on the military side. We're well positioned there.

Our general thought is that that does happen out there, probably especially in the states and municipalities, but hopefully, the commercial, industrial, manufacturing economy will have recovered to an extent to fill in the potential falloff in that area for us.

Okay. Thanks for that. And then if I look at kind of where we are in the non-res cycle and I use the Census Bureau non-res spending numbers, we're almost back to flat on those numbers, kind of where we were in mid-2003. And maybe you can -- having covered [stock back], maybe you can just kind of talk about how the environment feels like today versus towards the end of the last non-res downturn.

This is Bill George. I would say that there's nothing as far as the environment goes that compares to what's happening now. This recession is far worse than -- that was considered at the time the worst recession, apart from maybe the '70s, since the Great Depression. This recession has been far worse than that.

Having said that, that was a moment in time where work was starting to pick up. It turned out that that was the beginning of what was -- I would not say a quick recovery, but I wouldn't say it was a super-slow recovery either. We had a similar moment a year ago, a year ago last May, where it felt like activity levels were coming back. And I think that in this case, that is -- the sense is activity levels are coming back. I think there's probably more of a feeling of resignation and a feeling that it's going to be gradual and take a while.

Having said that, I think we've been at the bottom so long that the comparatives might still be pretty good because I do believe that there has been a fair amount of capacity and [destruction]. There has been a fair amount of reduction in capacity just due to the prolonged nature of what's been going on, so I think there will be a gradual buildout.

I think that's probably going to be a good thing, given what's happened to our industry after years now of 25% unemployment, but I do -- Bill and Brian, I do have a sense that there is at least hard stability now and unless something additional bad happens, a sense that there will be at least some building up of activity levels over the next while. What do you guys feel like?

Well, there's an imperative for some kind of growth in all businesses. We all know that businesses are sitting on tremendous amounts of cash. Everybody just (inaudible) capital has $76 [billion] of cash and it's just [electively] got to be used and I think expansion is part of that. It's just a matter of gaining some confidence.

Everybody talks about the uncertainty factor of government (inaudible) taxes, etc. I think that's less a factor than just having confidence that the consumer comes back into the economy and we can support future jobs for the service economy, like we have in the manufacturing economy. We're in a pretty major transition here from a manufacturing to a service economy.

Adam, this is Brian. One thing specific to us is our business is different than 2003. We're a lot stronger on the service side of the business than we were back then. We have consistently invested in that end of the business and it's paying off for us right now.

Yes, thanks, guys, nice quarter.

Thanks.

Thank you.

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

Thanks, good morning.

Good morning.

Good morning.

Good morning.

Bill, just talking on the first question, you suggested that 71% of the backlog is institutional and it doesn't really reflect, or necessarily reflect, what's in revenue. About what share of the revenue comes from the institutional market or really anything funded by a public entity?

Health, education and government broke about 50%. That's a couple of quarters ago and it stayed in the low 50s. We'll be publishing our pie chart in the next couple of days that we always put on our website that gives specific sectors, but I think that trend continues. So there's about a 17 to 20-percentage point difference between sort of what our revenues end up being, and that has to do with the average project size is bigger in that sector. So things live in backlog longer.

Okay.

And one thing, Rich, it -- the service side of our business -- of course, now, as Brian alluded -- is more than half our business, is -- it is not another (inaudible) cut. The government, hospitals, schools are not 71% of that or even 50% of that, as a matter of fact. So -- and that's a good thing. Those in government and hospitals and schools, those entities tend to have a lot of times their own maintenance force and their own (inaudible) like manufacturing and commercial activities too.

One other thing, Rich -- over the course of this recession, the areas that have been strongest have been health and various kinds of government sectors like -- or education, which is heavily government influenced. Historically compared to other mechanical companies on our scale, we have been stronger in the private markets, in part largely because of our geography and what that means about the composition of our work force and the markets we're in.

So I'm at least personally hopeful that as commercial, as sort of non-government-supported work comes back, that is a relative strength for us. I think it's been a relative disadvantage. I think we've been successful in going out and getting the work that was there, but I think we have a natural advantage on the other side of that ledger, but in part, geographically.

If you hack out -- if you exclude the retrofit portion of what you're calling service, and you just look at the pure service aspect, which by my recollection, is some 15% or 20% of your business, how has the demand for that measured up to your expectations throughout the recession?

Rich, it's Brian. That side of the business has held strong. We've actually grown it. The pure service, excluding the retrofit project that you categorized correctly, is 18% of the business and still growing, Rich. So our margins have held stable and we've grown steadily, as expected, through this recession.

Okay.

And Rich, the National Council of Business seems to be taking hold and that clearly has been the same that multi-location big box people, Petco and Home Depot, etc., and that's taking hold. And I think we've made a lot of strides there. Our call center in Indianapolis is busier than it's ever been, so things are working there.

And our margins in service have strengthened. We probably just booked our best service month ever from a financial metric point of view -- our best service quarter ever from a financial metric point of view. And there's a little bit of heat here and there and we --

(Inaudible), Rich, we've had some luck with this weather too.

Yes, it doesn't hurt, right?

No.

The last call, you had noted bid margins on new construction work in the low teens range and even for some huge projects, maybe even creeping down to the high-single-digits. Is that the environment that's reflected in this 15%, an encouraging 15% that you put up in the second quarter? Does that 15% in turn what you would expect given the backlog you have?

What 15% are your referring to?

Your 2Q gross margin.

Yes, okay, yes. I think that's just the mix of the -- service has much, much higher gross margins. I think for us to be averaging out to 15, that is indicative of pretty low gross margins on the construction side, particularly when you consider that our project size is as small as it is. So we don't -- fewer of our projects have large like equipment buys and large subcontractor buys flowing through them.

And Rich, you talked about the construction (inaudible) and I'd say that is still holding true. They're not going down, maybe eking up a little bit, but we're in the ballpark of what you referenced.

Okay. And then lastly, I mean, I realize ColonialWebb, you didn't buy this company for the first half of 2011. You bought it because the industry was so bad at the time, but could you talk about the early performance and what you see on their backlog? I mean, if they were a standalone company at this point, would they be profitable right now?

Well, if they were a standalone company at this point, in the year since we bought them, I believe they would be, but at much, much lower levels than they're used to experiencing. I think their service -- they're struggling. They've got a big construction market. When we bought them -- when we were making that decision in the spring of 2010, I don't think -- I think we were hoping that the recession was closer to ending than it was. However, we were prepared for the fact. It was explicit internally that we were prepared for the fact that we weren't buying it for, as you mentioned, for the immediate and the short term.

Their Service Division continues to do what we hoped and expected it would. Their [investors] Refrigeration Division continues to do well. Construction is experiencing exactly what so many of our construction departments across the Company are experiencing and they're having a hard time closing out big projects. They're having a hard time booking work at the margins that they need. They've started -- I think it's fair to say they've started to have a little more success booking work recently, but MidAtlantic -- the MidAtlantic was late into this recession, but it's found the MidAtlantic now.

Rich, this is Brian. I've spent some time in ColonialWebb recently and I continue to be impressed by the quality of the management and the personnel they have out in the field. I think in the long term, that's going to be very good for (inaudible).

Appreciate it, best of luck.

Thanks, Rich.

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

Hey, guys, it's Saagar on for Tahira.

Hi, Saagar.

Hey, well, first of all, congrats on a great quarter -- no execution issues, backlog up nicely, great organic growth, and that's where my first question comes in as looking at the 8.2% organic growth, really where do you see that going forward in terms of modeling it out? What can your -- really your growth level be?

We have our first uptick in 2008. It's hard -- as Bill said, I think, in his remarks, we're not getting carried away or declaring victory. I think it's a really good sign that same-store revenue levels should be finished falling. I don't necessarily think we will chart 8% increases every quarter. And what's interesting is, I think we have a chance at some modest increases, year-over-year modest increases, mostly just in light of what you saw. What's interesting is at these margins, this amount of revenue represents quite a bit more work than this amount of revenue would have represented in 2008 when pricing was higher.

So what that means is if you can your people a little busier, that's when you start to raise your prices, and I think that's a hopeful sign. We need to -- I think we're -- many of our divisions, companies, have -- not all of them, certainly -- but have enough work to where they can actually get a little picky on the price they charge for the next project they bid. Now, we've just got to find somebody who will pay it, and for that to happen, we just need a little bit of demand.

Um-hum. And then look -- as you mentioned margins, looking anything operating margin line, you upticked up to 1.8% versus what you had in the first Q, -- or in the first quarter, and that's still down from the previous year. Now going forward, had this been a quarter that had minimal execution issues, good weather, and I'm assuming good cost control, where can we really see that operating margin go forward for the ret of the year? Should it really be in that 1.5% to 2.5% percentage range or can it go -- tick a little bit higher, or would that be more of 2012 to see you tick them up 2.5%?

(Inaudible) come in here. I think it would be overly optimistic to get that up into the 3%, 4% area. We are dealing with just not as much work out there. There are competitive pressures as margin compression (inaudible). We are taking market share, but at relatively -- relative to our own past, lower margin work. I think we just can't depend on pushing that back up to what we'd ideally like to see in this 4% (inaudible) range. It's going to be a while and 2012, late 2012 (inaudible) would be a guess.

Well, you can get the gross margins up to the mid-16s, most likely, right, by the end of this year and into next year?

Not necessarily. See, what happens -- could that happen? Yes, that could happen. I suspect that you'll continue to see margins more like what you see now, even if we start to get -- first of all, we're doing well on the service business, right? So that's already averaging in at frankly the highest bites, but by small amounts, but at the highest level it's ever averaged in. So that's not going to be a source of incremental margin.

And on the project side, even if we start to book work at higher margins, it takes a late-cycle player like -- we will not recognize revenue in the early stages of a project at higher margins. We will start them out at reasonable margins that comport with what we've seen historically and we will wait until we're pretty well into a project before we'll start to make the judgments on our POC that raise those margins.

So the reality -- one of the reasons you will always see a company like ours -- you will first see recovery in backlog and then revenues and then you'll see it in rate, and that's simply because even if we get news that work has barely started and we're just not going to be -- you can't run a construction company making assumptions about much work you're going to -- how much money you're going to make later and letting that impact you early in the job.

So I think even if you're right about the underlying -- there are underlying atmospherics that you're sensing, but what I'm saying is even if you're right about that, it will take a while for that to come and materially impact our margins.

Perfect, thank you, guys.

All right. Thank you.

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

Good morning.

Good morning, John.

Good morning, John.

The first thing that -- Bill George, in terms of the tax rate, you're saying 25% to 38% this year.

You know want? You know what? I really had to -- that's an act of faith. What's happening to us on the tax rate, right, we aren't even profitable yet for the first six months, I hate to say.

Right.

By the -- so we will get profitable for the full year, we firmly believe, and so we [went up] as a taxpayer, but the actual amount of our total profitability will constitute a pretty small numerator for a fraction that becomes a percentage. And then because of the way that you have to recognize fair value adjustments and acquisitions, they run through your P&L, but the IRS still views them the way they always have and when you pay that, it happened; until you pay it, it didn't happen. And they're more likely to see something as purchase price than the new GAAP, and so that creates a big range of what our tax rate might be this year.

We're confident that it will be lower because most of -- we know that most of these factors cut a certain direction, but the range may even be bigger than the 25 to 38, John, and that's legitimately so. It only takes changes in the hundreds of thousands to move that rate pretty well. So when we model in -- now to try to answer your question, because you've got to do something with this. When we model internally, we're using about 35, but I have to be honest with you, there's a big range of what it could be.

Okay. But -- and I guess my question is going forward into 2012, that's still the rate we should be thinking of.

Once we start making decent amounts of money, we'll get back into the upper 30s and that'll normalize. Our rate will normalize. Our cash tax rate will normalize to the mid-30s and our GAAP tax rate will normalize back to the 38% to 40% range. This is just an odd year and in particular, it has big fair value adjustments coming through in a year when our overall earnings won't be that big.

Okay. And then my second question is just in terms of your business and what you're hearing from, I guess, your branches, it seems to me that coming into this year, the calendar year, it seems as if things were picking up in your later cycle business, and you're seeing some of those benefits in the second quarter, but more recently, I would say people generally have gotten more pessimistic. Are you seeing that in your business in terms of planning?

Yes, John, it's Brian.

Yes.

Absolutely. I think at the end of last year, we definitely had the feeing that things had stabilized and we were going to start ramping up. Things at the beginning of the year reflected that. Right now, I think there was a bit more pessimism on the construction side, but even services side, I think services are going to carry on, but we're still seeing a lot of bid activity. The bid activity, John, has not slowed down.

Okay.

Our estimating departments are full. The margins haven't come up and we've taken a hard look at what work we're going to take and not take. We're staying very disciplined still, which is a good thing, but I think you're right. I think there is a bit more pessimism maybe after the events of the last week or two. Things will get [freed] up a little bit, we'll have to see, but in terms of bid work and where we are right now, we are very busy right now.

Okay, good. And lastly, Brian, in terms of just thinking about your backlog relative to what we've seen in years past, given the service portion is the larger component, is backlog a good indicator of what we're going to see over the next couple of quarters?

I think so.

Okay.

It's always going to be for us. It's still half our business on the construction front. It's still a very important part of our business and I think you'll see it for a couple of quarters going forward and into the future, to be honest, john.

Okay. Okay. Oh, and I'm sorry, and one other thing -- in terms of acquisitions, Bill Murdy, I think you mentioned that you're seeing more opportunities out there. Are there some big opportunities for you this year?

Yes, big has a definition.

Yes, but you can fill it in.

Yes. We published the fact that we're -- our target kind of company is $20-plus-million revenues and a balance between construction and service. We're looking at (inaudible) some companies quite in excess of that. There may be multiples of that 20 and there are a few out there, but this is a very pragmatic business, as you know, and we want to stay (inaudible) shop and we want to be only associated with the best of (inaudible) area in whatever market we're in. So we're a little choosey, but we're actually getting [good] calls. Two years ago, you didn't get any calls from anybody. Now, we're getting some calls, so -- and we have an active program of investigating and analyzing full on.

So, I mean, based on your experience with activity levels in the past, do you think it's likely we'll see some things this year?

If I were a betting man, I'd say yes.

Right, thank you. Contributions on the quarter.

Okay. Thanks, John.

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

Thank you, good morning, guys.

Hey, Clint.

One first question -- how we should be thinking about the fourth quarter margins. I know the last three years, we had a bit of a lift in the fourth quarter. Should we be expecting that again?

I don't think that the factors that created that lift are likely to be as strong, which is closing out of jobs that have strong margins in them. If we have jobs with strong margins, they're unlikely to be closing out at that point, so I would say that you would not see that comparative. I hope I'm wrong, but I think that it's more gong to be more like what we are seeing this quarter.

Maybe we get a little help in the third quarter. The fourth quarter is going to be a seasonal fourth quarter and most likely, follows a pattern of ticking down slightly from the third quarter. But I will say though, the problem is we're on such small numbers that just a little discrete event can change these patterns pretty significantly.

That's helpful. And I guess as we sit back and kind of try to reconcile maybe how we should be thinking about 2012, and I don't know, Brian's comments seemed to indicate that there are at least some glimmers of hope that we can see a gradual improvement in 2012. I know when reading through your Q last night, at least the verbiage in there kind of indicates that you expect the activity levels to remain flattish for the next 12 months or so.

And I guess my question -- I know you don't give guidance, but if activity levels were to remain flat, and you didn't have any problem projects next year, could we be back at a 2010 earnings sort of level by next year?

I don't know. I think that we would -- we will be very disappointed if we can't improve next year, just given what we did in the first quarter of this year, but I do think that to the extent there's strength in 2012, at this point, it's going to be later in 2012. It's becoming -- we're sitting here now in August. It's going to be a tough winter again. We're going -- and we're going to have to start booking some work if we're going to see serious -- any kind of meaningful improvement in 2012.

Having said that, I would say that we at least have the help of a couple of quarters of backlog that's been flat. We now have -- a year ago, our backlog was noticeably lower than it is today. So I think you've got some small incremental help, but it's the kind of help you get from adjusting to the bottom, not the kind of help that we hope to get -- I think it's too soon to declare we're going to get the kind of help that you get when markets improve. We're ready for that though.

You can see some -- on the service side, especially the big [air] retrofit side, if that continues to improve, you could see that effect in 2012 before big higher margin projects (inaudible).

We feel great. It just takes a while. Recoveries take a while. We're a late-cycle player.

Got it. Thank you, guys. I appreciate it.

Thank you, Clint.

Your next question is a follow-up question from the line of Rich Wesolowski with Sidoti & Company. Please proceed.

Hi, thanks. Is there any reason Comfort would not pursue either a single attractive acquisition or a number of them, if it would take the Company to a material net debt position?

We -- what's material?

Yes, it's -- what's material, Rich? We --

Oh, I don't want to put out numbers, but how about rephrasing it? What's the minimum cash you need to keep on the balance sheet in order to just operate your business?

Well, we have liquidity. We have a very substantial bank line and this is a cash business we replenish fairly readily usually, but the answer to your basic question is we're not afraid of taking on some debt in order to grow the Company properly.

We're willing to borrow some (inaudible) debt this year to do the things that we'd like to do. If we were to get to the right place with the companies that we're talking to that we like, we don't have any problem borrowing the money we would need to make those acquisitions. I think beyond that, I have to -- really for me, deciding how much money I want to borrow depends on where I think my lowest moment of trailing 12-month EBITDA will be.

That's sort of -- and we are going to keep -- it is our goal always to keep a serious safety margin between us and our covenants to keep our bonding companies completely comfortable. So I think we're willing to borrow and really, I'm hopeful that by the time we get to the end of what we'd be willing to borrow, we have enough confidence that EBITDA, whatever is happening, is at least going up, that then gives us additional comfort. Nothing -- it shouldn't stop us from doing anything we want to do this year is the simplest answer.

Your answer kind of drove to the heart of my second question, is that do you think the change in that attitude -- do you think there has been a change in that attitude over the last 18 months to two years that speaks to your confidence that your business will be a lot better in the next 18 months than it was in the last 18 months?

I don't know. That might be reaching a little bit. I think we believe in our business. We believe it's -- we can -- it's a good business. It doesn't go away. We can meet our payroll, we can -- we don't go anywhere near areas where we have to worry about whether we could pay back our banks or take care of our commitments.

I've do think -- I think that a moment will come when we might be willing, depending on opportunity, to be more expansive, but I don't think that it's fair to say that our view of near-term prospects is driving us to want to take on more debt. I think it's more our view of our long-term beliefs that this is a solid business that allows us to take off debt -- take on debt right now.

Well said.

Thanks again, I appreciate it.

Thanks, Rich.

Ladies and gentlemen, that concludes our question-and-answer portion of today's call. I would like to turn the call back over to Bill Murdy for closing remarks

Thanks, everyone, for participating. See you in three months.

Thanks.

Bye-bye.

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