Comfort Systems USA, Inc. (NYSE:FIX) Q1 2008 Earnings Call Transcript May 2, 2008 11:00 am ET

Bill George – CFO Bill Murdy – Chairman & CEO Tom Tanner – COO

Jack Atkins [ph] – Stephens, Inc. Clint Fendley – Davenport & Co.

Tahira Afzal – KeyBanc Capital Markets David Yuschak – SMH Capital Richard Wesolowski – Sidoti & Co.

Thanks, Eric. Good morning everyone.

Welcome to Comfort Systems USA's first quarter earnings call. Our comments this morning as well as our press releases, contain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995.

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

You can read a more detailed listing and commentary concerning our specific risk factors in our Form 10-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 Tom Tanner our Chief Operating Officer.

Bill Murdy will open our remarks.

Thanks, Bill. I'm going to keep my remarks quite short here and turn things over to Tom Tanner and Bill George.

But we're quite happy to report our Q1 '08 results, $0.20 a share versus $0.04 a share for Q1 '07. The turn around in our Atlas multi-family operations and very solid results across most of the country have produced a very promising start for Comfort Systems for 2008.

Revenues in Q1 of $295 million were up 18.5% from Q1 of '07. And on the same-store basis, i.e., without the additions from our recent acquisitions, revenues were up 13.5%.

Backlog – and I know this may be a focus of this call, backlog as of March 31 was $811 million compared with $787 million at year-end and $701 million a year ago. And taking out the backlog that came with the recent acquisitions, same-store backlog is down about 7% from year-end; however, on a same-store basis again at $733 million backlog is at a historic first quarter end high, even with our purposeful and prudent truncation of backlog at Atlas.

In addition, we've had some significant recent bookings here in the Q2 [ph]. At this point, I would like to turn it back to Bill for some financial comments and for your details.

Thanks, Bill. Let me just take a minute or two and fill in a couple of additional details of our results.

The first item that I want to update is in some data relating to our progress and accruals at Atlas. As Bill Murdy indicated, Atlas is on track with its recovery plan and it broke even in the first quarter as compared to an approximate $7 million loss in the first quarter of 2007.

Atlas revenues this quarter were down $5 million compared to one year ago. And its backlog was approximately $25 million less than it was one year ago.

Also, you may recall that at the end of 2007, Atlas had a total of $6.2 million in accruals relating to claims and contingencies on certain of its legacy jobs. As of the end of the first quarter, these accruals stood at $4.4 million and the new team at Atlas has made progress in resolving a number of these jobs at or below the amounts.

We feel that the accruals remain adequate and prudent for the underlying matters and will allow us to fairly resolve or to fight claims where we deem appropriate. It is our best judgement that these accruals are sufficient in light of the remaining risks, even though we expect to it vigorously contest many of these matters.

Cash flow is a negative $3.7 million this quarter, which we view as very positive in light of our historical first quarter performance and given the remarkable positive cash flow of $55 million in last year's first quarter – fourth quarter. This is probably our best first quarter ever for cash flow.

Our cash balances remain strong at $86 million, especially in light of our expenditures on acquisitions and stock repurchases. Since year-end, our stock repurchase program has continued to return money to it our stockholders in a disciplined way, and as of today we've retired 1.2 million of our outstanding shares and returned over $15 million in cash to our shareholders through this program just in the last 12 months.

Our cash balance was also reduced in the quarter by investments that we have in auction rate municipal notes. At the end of the quarter, we had $18.5 million in municipal obligations, all of which are direct obligations of the municipal issuing entity and all of which are from highly-rated obligors.

Since the quarter ended, approximately one-third of our obligations have been sold at full value or have been called by the municipality, and as a result $6.8 million of the obligations were recorded as currents as of quarter-end and $11.7 million the remaining obligations are carried as long-term assets. Our balance sheet is rock solid, and not just because we have strong cash balances and very little debt.

Over the last few years we have deployed our balance sheet strength into our operations in several ways; for example, by purchasing equipment instead of leasing it and through overall improvement in the quality and efficiency of our physical plant and resources. Like our investments in training and service and other areas, these moves will improve our results and opportunities for years to come.

Finally, I want to note our acquisitions, which were a positive aspect of this quarter adding $12 million in revenues, and contributing positive earnings of approximately $0.01 a share. The EPS contribution from our recent acquisitions was reduced by the amortization of intangibles relating to backlog, customer lists, and other business factors that we are required by GAAP to value, place on our balance sheet, and charge against our earnings.

If it were not for the amortization, our acquisitions would have contributed approximately $0.02 per share this quarter. Overall, our backlog remains strong and we are optimistic about our short and long-term value prospects.

We feel that through discipline and work selection, tight execution, solid cash practices, and above all because we have the best technical and project management work force in the industry, we can be successful in any market condition. That's it on financials.

So Tom Tanner, our Chief Operating Officer, will address you.

Thanks, Bill. Good morning everyone.

We would like to thank all of our very talented team members for their continuing efforts which resulted in our record first quarter performance. This is traditionally our weakest quarter of the year, which makes these results even more satisfying.

As has previously did not discussed, a large percentage of our improvement year-over-year comes from our Houston-based wealthy family housing company, Atlas Comfort Systems, which improved from a $7 million loss in the first quarter of 2007 to a breakeven in the first quarter of 2008. The continuing efforts of the company's new management team are reflected in the much-improved first quarter results.

At Atlas, they are focused on improving both their project pricing and their project execution. They have exited several markets so that they're not only a smaller company but a company much more focused on a limited number of geographic areas.

Their backlog by design is down $25 million year over year. They continue to work on closing out certain legacy projects in Washington, D.C.

and the Florida Panhandle. As Bill has previously mentioned, certain projects were closed out this quarter for amounts equal to or less than we had accrued for at year-end.

We continue to believe that we have the appropriate accruals to either close out or litigate the remaining legacy projects without additional negative financial impact. We would like to thank the Atlas senior management team and all of the Atlas team members for their continued commitment and dedication to return Atlas to profitability.

We believe that Atlas will continue to perform at a break-even level for the balance of 2008 and then make a positive contribution to our 2009 financial performance. The other large percentage of improvement in our year-over-year results came from the very strong financial performance of a great majority of our other operating companies.

The strongest performances were achieved by: Tri-City Mechanical, Phoenix, Arizona; Hess Mechanical, Washington D.C.; North American Mechanical, Madison, Wisconsin; SI Goldman Company, Orlando, Florida; Comfort Systems USA, Syracuse; Batchelors Mechanical, Mobile, Alabama; CCI Systems, South Boston, Virginia; Quality Air, Grand Rapids, Michigan; Comfort Systems USA, Arkansas; our National Accounts Group from Indianapolis, Indiana; and Madera Mechanical, Tucson, Arizona. We continue to see results from our investment in our energy services group to increase its resources and to enhance our knowledge and expertise in the areas of improving energy efficiencies and increasing our involvement in LEED certified projects.

These investments have not only results in increased project bookings, but they've also greatly assisted our efforts in securing large multi-year preventive maintenance agreements. We're also continuing to invest in our service divisions in several ways.

We continue to improve the recent leadership for our service operations. We have significantly improved the management and sell of our service organizations.

We are expanding and improving training and education for our service technicians. We continually upgrade the quality of our sales force.

We are investing in improved technology to enhance our productivity, both in our field and in our back office support. Thus, we expect to achieve strong increases in our service revenue, our service operating income, and our preventive maintenance agreement base in 2008.

On a same-store basis our backlog is up $33 billion [ph] year over year, and if you exclude the Atlas backlog, which is by design down $25 million, our backlog has increased 10%, even without considering the considerable backlog of our newly acquired companies. Although our backlog was at a very comfortable level at the end of the quarter and April bookings were consistent with prior yields, we certainly recognize the potential impact from the weakness in the overall economy.

Although the great majority of our companies are extremely busy and most of our pipelines are still active, we are beginning to see a little softness in a couple of markets, most notably San Diego. As a result, we are focused on reducing our costs wherever possible and many of our companies are developing continuance plans to minimize the potential negative effects of a future downturn.

That being said, we continue to be optimistic about our future. We have a very strong backlog.

Our current operations are much more efficient than they were during the last severe downturn. We have substantially grown our service operations in the last few years, which will greatly help us smooth out the negative effects of a downturn.

We have strength in our company with solid acquisitions of Madera Mechanical and Air Systems Engineering in 2007, and Riddleberger Brothers, Merit Mechanical, and Conditioned Air in 2008. These new companies have added significantly to our backlog which is at a record level of $811 million.

Moving forward, we will be very diligent in managing our business, but as we begin the most active time of your year, we have very strong momentum from our 2007 first quarter of 2008 results, plus we continue believe we will have improved financial performance in 2008 as compared to 2007. I will now turn it back over to Bill for his wrap up and then questions.

Just some hitchhiking on some things Tom said. Our backlog is near historic highs and our indicative pipeline of business so far this year is very, very good.

We believe the Atlas situation is well on hand and we are quite encouraged by what is going on there. As I – we're not sure what the late 2008/2009 non-residential economy holds for us, but we do know that Comfort Systems is much better positioned for whatever might happen.

We're not – I'm not saying that we believe there is a downturn of any significance coming, but should it happen, we are better prepared. For instance, we compare today to five years ago, first quarter of '03, and '03 proved to be a recessionary year for everything.

Today we've got twice the backlog, we've got recurring service business, great – 50% greater than at that point five years ago. We have additionally significant initiatives in energy efficiency, which are gaining traction.

And our efforts to improve productivity via our considerable efforts of training and instituting processes throughout our operations are having and have had substantial impact. As Bill mentioned, our cash balances are substantial with very little debt.

And we've added operations recently, which add to our mix. We are not necessarily looking to cover every geographic location, but we are indeed filling in the map, and we expect the revenue and net income from the five fairly recent acquisitions to be quite handsome going forward.

We will continue to look at prudently adding high-quality operations in geographies where we are not currently represented or occasionally to supplement where we are. And we believe our strength and our positioning will provide continuing very fine results for Comfort Systems, and we continue (inaudible) notions that our '08 will be considerable better than our ' 07.

At this point, I would like to open it up to questions, Mr. Moderator, and I guess you'll queue those folks in.

Hi guys, this is Jack Atkins [ph], I'm on the call for Matt. How are you all doing?

Great.

Congratulations on the great quarter. Just had a couple of questions for you.

First of all, you mention your backlog excluding acquisitions was down a little bit sequentially, how much of that was due to the strong construction quarter you had versus maybe a sign of demand?

Well, certainly we had a very strong first quarter. Weather generally was good, so we were able to get out and perform a lot of construction activity, which is very good for us going into the summer, especially in light of the fact that we really have remarkably robust backlog levels.

And any kind of head starts you can get going into the kind of summer we expect to have, it bodes very, very well for your overall year. So, certainly it's the case that we closed out a lot of jobs that had some revenue left at the end and that comes out of your backlog, obviously that's where we got some of our robust results.

So, when you burn backlog, it affects your backlog number.

Yes, absolutely. And I guess kind of to that point, what does bid activity look right now and should we expect to see backlog I guess go up sequentially go up in the second quarter?

The second quarter has exactly two months to run yet. We are seeing good indications.

We've had some robust bookings in April. Tom walked in here, indicated another job was just picked up by one of our large construction-oriented operations.

I don't know Tom you want to go [ph] on that?

In talking with our companies, we see some very interesting opportunities in the marketplace. Some very large-sized projects that were diligently working on with limited competition.

So, today we are still very optimistic about our booking capabilities in the second quarter. I think we also, when we get to a record backlog, our companies have to work through work and some of these projects are 18-month projects, and so as their backlog begins to diminish, they can't add to it because they still need to finish this work.

So you will have some ups and downs in backlogs, relative to several large projects that our companies have secured in the last 18 months. So, we're not as concerned about the slight decrease in backlog today as other people might be.

Okay. Great, thanks for that.

And you guys have done a good job putting your strong balance sheet to work by making acquisitions. I was wondering what acquisition pipeline looks like now after you just closed three deals?

Well, we while we're not announcing anything, I think you can logically assume that we're continuing to talk to operations around the country, large, small, and there is interest on the part of independent operations to become part of us and vice versa. We're not, though, going into feeding frenzy here and won't.

I don't know what the potential non-residential construction downturn, and I say potential downturn, I don't know what the effect of that will be on valuations of the private entities. Most of the entities we are looking at are of a quality where that's going to have a potential effect but not a great effect on pricing operations.

Okay. And the three acquisitions you made – I guess that you just made, how accretive should those be in '08 and '09, any idea?

I think the best way to look at it would be to look at the press releases we did for those acquisitions. We recited pretax earning levels that those companies had gotten in the past.

I think we certainly expect those companies to do at least as well this year as they did last year. Now we only have two good months of Riddleberger and Merit in the first quarter, and we only have – I'm sorry, one month each and Conditioned Air hasn't shown up yet.

So, when you look at those numbers you need to annualize them for the months we have. And then the other point that I made in my prepared remarks is very important, which is we are required by GAAP nowadays to undertake a valuation analysis that requires us to assign a pretty significant value to the backlog that we require.

As a practical matter, what that means is once you assign that value you amortize it off and it makes some of the earnings that you're actually earning as you do that work not show up on your earring line. But shows up in EBITDA, right?

So you can still measure it. Stockholders can still make sure it's there if they want to, but it does make the acquisitions considerably less accretive from an EPS point of view.

For example, the combined four companies that were showing up then in some way in our result this quarter would have given us $0.02, and they gave us $0.01 as a result of that amortization.

Okay. Great.

And one last thing here and I'll jump back in queue. What were Atlas sales in the quarter and what were they versus the fourth quarter of '07?

Atlas sells in this quarter were $22 million and change. I'll have to look up their fourth quarter numbers.

I know a year ago they were $5 million less, I think in the fourth quarter – $5million more. I'm sorry, $27 million in the fourth quarter of last year.

Let me take a moment and --

And Bill, if you could look up the Atlas backlog as well in the fourth quarter, just trying to see if there's a sequential down tick in Atlas backlog there too, so --

The Atlas backlog is relatively the same between December 31st and March 31st.

Okay. Great, thanks a lot guys.

Just – they had $20 million of revenue in the first quarter – I mean in the fourth quarter of 2007.

Okay. Great.

Thanks.

Good morning, everybody. Congratulations on the nice quarter here.

Thanks, Clint.

Bill Murdy, I guess if we looked at projects by size and comparison to maybe a year ago, it looks like most of the growth, apart from maybe a couple of projects in the $15 million to $30 million range, has been in some smaller projects, $1 million to $5 million or so. What kind of impact should we expect that to have on the margins going forward?

First of all, you're right that we haven't seen a big increase in size of project. Traditionally, historically, the smaller projects have been more profitable than the larger ones.

Larger projects over larger period of time, multiplying the certainties and conditions, et cetera, and net setting aside all consideration of multi-family projects, just any project of any duration has a little bit more risk in it. But as to coming up with a precise prediction as to how it will effect net, that's really kind of difficult.

I think traditionally smaller-sized projects though have been slightly more profitable.

Is there any impact on working capital from the smaller projects?

Probably positive.

Okay. And I guess on the pricing.

I mean how are you seeing that holding up currently and any color on just the commodity prices, the effect that they might be having here on the cost side?

Well, we – I'll let Tom handle this. I think in certain markets, there may be a little more competition for projects.

We haven't seen it show up in the probable margin that we're putting projects on the books for. Tom, you want to talk about it?

Well, the commodity price increases are certainly a concern, but would we acquire projects. We typically buy materials and equipment immediately so that we insulate ourselves from those price increases.

Today, any work that we're pricing has a maximum length of 30 days, at which point if the project hasn't been awarded, we are reviewing the prices of our commodities in those projects, and our size and strength gives us the ability to – we have advance knowledge of price increases. Typically, there's a little lag of when they're announced and when they're in effect, so we can often go out and purchase materials at that point if we need to keep them within the range of within our estimates.

So, we actively manage that process daily in all of our organizations.

Okay. And Tom, on the weakness that you had mentioned within the San Diego market, is there – give any more color on that, I mean what vertical were you seeing that weakness in?

We're seeing increased competition there and then there was that company has done quite a bit of high-rise work and we're seeing a slowdown in that. They had a project that never went into backlog, but we were very confident of in the $10 million range that has been postponed.

So, and we're seeing increased competition levels there in addition as I previously mentioned.

Okay. And Bill George, I guess on the, I guess, the $2.2 million decrease that we saw in the accrual for the asserted back charges, how much of that was in cash?

Well, what typically happens is we end up either walking away or collecting some cash. So, I guess it's non-cash from the point of view from what's happening with the accrual, because most of these jobs we're owed money at the end and so the net is we collect a check when we resolve them.

Okay.

Yes, Atlas was strongly cash flow positive in the first quarter, and frankly had – by the way this is a very good shine has had good cash performance now for many months running and that's definitely a leading indicator when you're looking at the health of organizations.

So is your outlook for sort of break-even performance for Atlas is that – was a pretty heavy dose of conservatism for the unit given that things are appearing to be better?

The answer I would say no and the reason is because we're not loading their new jobs at particularly high margins. We're waiting to make them prove that they can do those margins, and I'm not sure we're going to get comfortable enough to show a lot of profits from that company this year.

Frankly, we're going to be thrilled if they can just affect the $20 million turnaround. And certainly it's possible they would earn something later in the year, but it's so small in comparison to the real issue here, which is making sure that company is running right, that it's not losing money and that it's prepared to have a good 2009.

I wouldn't expect that you would see that.

Okay. Okay, that's helpful.

And then final question. Bill, did you have a DSO number for the quarter and how that might have changed from last quarter?

I have seen preliminary DSO numbers. We just haven't gotten into all of our analysis yet, but they seem to be tracking the same as usual.

I will tell you all of our – we have looked at quite a number of collection statistics and most of them are either as good or better than what we've been seeing, and in particular things like bad debt and reserves are in very good shape, and our company-by-company evaluation of the risks as of right now is very, very good. I would say – I reported to our Board of Directors yesterday that our collection statistics are tracking very well, at least as good as they have averaged over the last couple of years.

Great. Thanks, guys, appreciate it.

Good morning gentlemen. Congratulations on the quarter.

Thank you.

Just had a couple of broad macro-ish things I wanted to run by you. When you look back in your experience and look at the prior slowdowns, is there any kind of pattern that we should be looking out for in terms of how the slowdowns have occurred in the past?

Are there any specific regions that you watch more closely and markets that you watch more closely?

Bill's an economist here, so I'll turn this to him. I haven't said this before, I mean, the last downturn in the economy, the '02, '03 downturn in non-residential construction, was so radical, so deep, so punctuated that, and you may want to recall that we got through that with positive – earnings positive cash flow, actually paid down debt in that period.

Whatever we're sensing here now is nothing related to that and that prompted my comments before. I mean, not only we are better prepared, we're better prepared for something that we don't think in our most extreme thinking is as radical as what we've already experienced and done well in.

I would agree with that. In fact, if you look at what happened after 9/11.

First of all it was a horrible year leading up to 9/11, epically weak for non-residential construction. After 9/11 things stopped for several years.

And even when the economy picked back up, our markets didn't pick back up. We continued to have year after year of decreasing and in fact double-digit decreasing construction activity in non-residential.

And as a result of that, you end up with a situation now where as we may be heading into economic weakness, we have the unusual situation of vacancy rates are below 10-year averages in offices. Hospitals have good demographics driving them.

Schools have great demographics driving them. Most areas that we work – we're just not overbuilt the way we normally are going into a recession.

Now this is a financing-led recession, which is an interesting wild card, but that being said, companies have more cash than they've ever had, and frankly they have better profitability as a percent of GDP than they've ever had. So, I believe it's a very, very hard time to call what's going to happen in the underlying economy.

I think it's very clear that there's going to be a consumer-led recession. I think that certainly McGraw-Hill is right.

They have new numbers in the last week or two. It's certainly true that they've taken some discounts off of the numbers they were showing, but the absolute levels don't look like they're going down all that far, and frankly, they never got that high over the last couple of years.

So, people who know us on this call and virtually everybody on the call knows us, we're not a particularly optimistic company in some ways, but at the end of the day we're having a really hard time where we are doing a lot of contingency planning, but we're also preparing to frankly execute a lot of backlog we have that's proportionately more than we've ever had other than the last couple of quarters. So, it's a tough one to call, Tahira.

Sorry to spend so much time on that.

No. I mean, that was actually very helpful.

So, thank you very much on that. I guess the only other question I had was, as you see backlog and walk-in work proceeding with the growth of this year, if there is a slowdown, which one do you think would get impacted first, and what would you be looking out for if that's the case?

Well, backlog can be impacted either by a slowdown or just by people committing later in the cycle. People were racing to get resources committed over the last couple of years and that's one of the reasons why backlog has outpaced revenues the way that it has.

So, I think it's hard to call. And I would even caution that flat backlog isn't necessarily bad news, and you also have it in the face of something that mathematically will reduce our backlog, which is our rotation out of multi-family is a rotation out of the our largest – our category of our largest jobs and those become over-represented in backlog.

They're 40% of backlog when they're 20% of revenues, which means when you rotate out of that, you have an effect on backlog where your backlog can be less robust than it would have been on sort of the bottom line number. At the same time things can be getting better.

You don't know if they're getting better or worse. So, I spend a lot of time talking to you guys about backlog because it's a really tricky area.

At the end of the day when we do our internal planning we spend a lot of time just figuring out how much we think we can improve on what McGraw-Hill said that's going to happen.

Okay. Thank you very much.

That's very helpful.

Great quarter, guys. Let me just spend a little time – can you hear me?

Yes.

Let me just spend a little time on outlook for non-residential construction and this whole idea of lending ultimately is going to have an impact on business because one of the things I do find interesting is as well respected as Dodge has been about their long-term outlook. They've been calling for substantial weakness for what, six, nine months because of lending practices tightening and certainly hasn't shown up yet.

But I'm just wondering from your point of view, the business in the first part of this year is probably better than most people expected. From your point of view as you start talking to potential client about the business, how do they see lending issues being an issue with them?

Well, David, we haven't done a poll or analysis. We have some sensing.

Remember, we're I think dealing with the best, when we talk about projects around the country, a lot of them are schools, hospitals, government facilities. A little more military work than we've done in the past.

Those are pretty much insulated systems from financing questions. We watch school bond issues carefully.

We show the financing there, but the military has got a huge backlog in budget, and we have some manufacturing work. In fact, I think 12% of our product revenues in first quarter came from manufacturing and those are big companies right now with very good balance sheets and capability to continue their plans and their sort of over the horizon building and work.

I think the weakness – and I'm just speculating here, the weakness in financing will come in I think multi-use kinds of things in downtown centers that are maybe overbuilt and overheated a little bit, and maybe San Diego is one of those, but we're not in those places. We're not in south Florida.

We're not in Vegas, except for doing schools' work. So we finished – and we're finished what we're going to do in north Florida.

The legacy projects. Houston is a great example.

I was just listening to a big transcript of the Urban Land Institute meeting here. Houston is going to add 100,000 people a year for the next 10 years on anybody's estimate.

Those people have to live somewhere. They have to work somewhere.

There's going to be facilities built and Houston is – yes, the advance of $100 oil to fuel a lot here, but we see that a lot of places, population growth, people refurbishing, building new facilities, office, everything. For instance, we are looking – we Comfort Systems are looking to renew our lease here.

There are not a lot of options within an easy radius of where we are. In fact, there are no options within an easy radius of where we are.

So, we're not sure that things are as dire out there as talking heads CNBC are trying to talk us into.

As far as the backlog, as you look at your current quarters' revenue that you produced out of backlog plus where you were at the end of the year for backlog and where you think you can be in way of new business coming in, is there anything that is shifting in that way of you're booking and burning here that would cause some concern in backlog and issues that you could kind of describe could weaken from here versus at least staying in pace of increasing because of the potential surprises to the upside? Just kind of curious where your concerns would be as you look at that book to bill?

I think our first concern would be in some of our larger markets that have been impacted by the residential housing situations which would certainly be San Diego and potentially Phoenix. Other than that, our companies are, in many cases they're the go-to company in their market, so they're having opportunities to get projects where many of our competitors basically don't have a lot of work.

So we're encouraged by that. We're encouraged by the opportunities that our companies are being presented with on a weekly basis to get involved early on in some very substantial projects.

We had an instance two days ago where one of our companies was brought in on a project, where they will have a 50% chance of getting it and it will be the largest single job that Comfort Systems ever has booked. So, we continue to see that out there.

Office building in some markets will, if there's not tenants for it, probably won't get financed. Weak projects in the high-rise multi-family condominium business if there's not demand will not get financed, yet we see and Dodge believes that there will be an uptick in the rental aspect of multi-family housing.

So broad-based, we're confident today.

Yes. What I was encouraged was on some of the comments you made, Tom, and you might just expand upon it a little bit.

When you were describing some of the operations who turned in excellent results some of those places were where you not expected it to be like Syracuse and Michigan, wasn't it you said and a couple of the places in the upper Midwest that would not have been thought of as good execution opportunities. Could you help us explain where some of those pleasant surprises were then?

Well, actually we have an award for a company that achieves outstanding performance on an annual basis, and we've now gotten up to eight star awards, which means the company has achieved outstanding performance eight years in a row. The two leading companies are Syracuse, New York, and Quality Air in Grand Rapids, Michigan.

We have consistently done extremely well in small markets where we're the go-to player there. So if you look at our results, our northeast region has consistently been our strongest region in cities like Buffalo, Syracuse, Albany, South Portland, Maine, Manchester, New Hampshire, and then down of course into the Washington area.

So, we have done very well in these smaller markets and we continue to believe we'll do well. Currently, our company in Mobile, Alabama, is performing very well.

Orlando has always performed very well, which is obviously a larger city. Birmingham, Alabama, this company in South Boston, Virginia, has a record backlog and is producing great results over the last two or three years, so we continue to do very well in the smaller markets.

Okay. And just one last question as far – as you indicated in this quarter, you had done a lot of things and closing out a lot of projects which basically says beginning – coming into your seasonally-strong period, you're releasing resources to take care of other new opportunities.

But you also indicated like in San Diego others are seeing some resource releases because of wind downs in project and said some things are competitive there. I can look at resource releases two different ways.

One is, it could suggest things are getting more competitive around the country, or resource release says, I got more releases earlier in the year than I would normally have had over the last couple of years to go take advantage of other new opportunities. How do you read that yourself today on the competitive factor becoming more of a problem versus giving you the opportunity to do more work?

Frankly, today, probably more than 50% of our companies are hiring today. We need resources for our backlogs.

In the areas that are reducing slightly, even in San Diego, they still have a substantial backlog. The first people to get eliminated are your seed players that typically helping improve your operating results a percentage basis because you have better productivity and better efficiency, and also as some of our competitors are slowing down, we will take that opportunity to add better players to our existing teams.

So, we look at those as opportunities. We have the ability to shift some resources.

We have a couple of companies right now that are providing help to other companies because they have backlog that is a month or six weeks away and they have people that they don't want to lay off, and we've switched those people around. We've got three companies today that are doing that.

So we continue – as we get stronger and better know each other as a company, we get much better at sharing resources.

Taking Bill George's comments earlier about being somewhat pessimistic, but it sounds like what you're describing, Tom, you're hiring people not laying them off or not worried about utilizing them.

We just have significant backlog and one of the things that we said earlier, when you get this backlog, we don't want to repeat Atlas. So, if we keep driving up our backlog, all we could end up with is another Atlas situation.

So, we need to work down this backlog and then people go out and look for additional opportunities. Our companies in some of the markets have turned down opportunities and will continue to turn down opportunities to match their resources with the amount of work that they have in their backlog, and then when the backlog lessens, then they seek opportunities.

It's very difficult for us to understand how this might play out over next six to 12 months.

I guess it goes back to what you said earlier, Bill George, about managing that backlog to profitability rather than just managing it to grow it I guess, is kind of what you say. Is it that you wind it down, rev it back up, making sure the profitability is there and not so much to stay focus on growing it as rapidly as some people may want you to do, I guess.

Is that fair to say?

Yes, that's fair to say.

Thanks a lot. Good morning.

Good morning, Rich.

Just to get it straight in my own head. You booked $2.2 million accrual for close out for Atlas and the active backlog made about that much money?

No, we didn't book any incremental close outs, we just resolved some things so the accruals got used. We had a number of …

The contingency was used.

-- challenged jobs and we closed out a bunch of them and that's what the contingency was there for.

And the active backlog was about breakeven.

Yes. From the end of the year to now their backlog's about even.

It's still under $100 million.

Okay. If we look at the revenue from just the five acquisitions you made in the last year from Madera to the most recent Air Mechanical, I have an incremental '08 revenue estimate of about $105 million.

Is that in the ballpark of what you're expecting?

Let me think.

That's about right.

Yes, that's certainly in the ballpark.

Okay. And finally, Tom mentioned cost reduction initiatives in response to the market, but also that 50% of your companies are hiring.

As a group of merit contractors, can you discuss the flexibility of your SG&A over the next couple of years as the market changes?

It's extremely flexible. One of the biggest pieces of it, which is bonuses, is extremely flexible.

Most of our increase over the last couple of years has been in incremental bonus payments. And then as far as the – it's really the flexibility of SG&A and a lot of indirect costs.

In this industry they're fairly flexible. Frankly what you find yourself in is hard decisions about productive capacities that's extraordinarily valuable.

I mean this is an industry where the work force is becoming more and more valuable over time. The average age of the people who can do this work well is going up.

And you could easily cut your costs. It's not hard to do.

Most of our costs either have legs or wheels, frankly. But you make hard decisions, because Comfort is a very – has extraordinary long-term value and just have to be right in what you do.

But you put your finger on something that is one of the most difficult things we do. What we do with estimators, supervisors, engineers, et cetera, when there might be an air pocket in work.

That traditionally has been a seasonal situation for us related to the Q1, and it always worked out for us. We have substantial load of work coming on after that.

And we're very mindful of that, Rich, and know what to do. Doing it is difficult.

I was just wondering if it forces you to make a call on the direction of the business further out than your normal six-month visibility range.

I don't think so.

Okay. Great.

We'll risk abruptness in favor – or in lieu of being premature.

Remember we are – we do lag, we're the late cycle players. So we get – there's some disadvantage to that, but one gigantic advantage to that is we work on a building after the hole's been dug.

We do a little bit of work when the hole's been dug, but an awful lot of our revenue comes when it looks like a building. Yes, that's an indicator you ought to be able to figure out.

Whether the building you expect to mobilize your guys onto, whether the hole got dug. So in some sense, I don't think it's the case we have to worry about getting surprised.

I think we have to worry about striking the right balance to create true value for the people who are in this company over a long period of time.

Okay, thanks, and thanks for the detailed call.

Thanks, Rich.

Thank you very much. And thank you all for being with us and listening and having questions.

I would just like to add to Tom's words about congratulations and thanks to our individual operators and operations out there. They've done a spectacular job and we look forward to more.

So, thank you very much. That's it.