Comfort Systems USA Inc. Q3 2008 Earnings Call Transcript

Nov. 1.08 | About: Comfort Systems (FIX)

Comfort Systems USA Inc. (FIX

Q3 2008 Earnings Call

October 31, 2008 11:00 am ET

Executives

William George – Chief Financial Officer.

William Murdy – Chief Executive Officer

Thomas Tanner – Chief Operating Officer

Analysts

Jack Atkins – Stephens Inc.

Richard Wesolowski – Sidoti & Company

David Yuschuk – Sanders, Morris Harris

Clint Fendley – Davenport

Tahira Afzel – KeyBanc Capital Markets

Tristan Richardson – Dave Davinson

Operator

Welcome to the third quarter 2008 Comfort Systems USA earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Bill George, Chief Financial Officer.

William George

Welcome to Comfort Systems USA's third quarter earnings call. Our comments this morning as well as our press releases contain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. What we say is based on the current plans and expectations of Comfort Systems USA.

Those plans and expectations involve risks and uncertainties that could cause actual future activities and results of our operations to be materially different from those set forth in our comments. You can read a more detailed listing and commentary concerning our specific risk factors in our Form 10-K as well as in our press release covering these earnings.

On our call with me this morning are Bill Murdy, Comfort Systems USA CEO and Tom Tanner, our Chief Operating Officer. Bill Murdy will open up with remarks.

William Murdy

We are very pleased this morning to be announcing the best third quarter in Comfort's history with a net income of $0.34 a share versus $0.28 in the corresponding quarter of last year. Revenues for this quarter including our recent acquisitions were up 22% from the quarter last year and on a same store basis, we're up 8%, and this of course includes the deliberate reduction Atlas revenues which we talked about before.

Our cash flow remains exceptionally strong at almost $18 million for the quarter and we ended the quarter with almost $100 million of cash on the balance sheet. Backlog at September 30 was overall over $800 million and although it was down slightly on a sequential basis, same store calculation that again gives effect to the reduction in the Atlas work.

Our bottom line which shows a 21% increase over the third quarter of last year is really a tribute to the efforts of our teams across the country. Our work at improving our processes and our procedures which ultimately enhanced productivity, all of this shows continuing very good results.

For the nine months ending September 30, our net income showed an improvement of 60% over the first nine months of 2007 at $0.92 a share versus $0.57 a share. Improvement to that of course helped us in this regard. Our revenues for the first nine months of 2008 came in just short of $1 million.

I'd like to conclude my brief opening remarks here by saying we believe we can continue our strong performance in what is at least an uncertain path forward here for the economy. We demonstrated a track record of business getting, of expense control and certainly cash discipline and we believe we have in place the fundamental elements for efficient execution.

Further, we are in a good essential business and we are situated well within that business solidly in this large and growing mid range of HVAC mechanical construction and service. Our focus on retrofit opportunities, repair, service as well as our very important emphasis on energy efficiency driven work, we believe will enhance our success moving forward.

Further, our strong balance sheet that will allow us to capitalize on opportunities as they arise and we see no reason not to continue prudent acquisitions, not that we're going to continue our cash dividend and our stock buy back programs.

At this time, I'd like to turn it over Bill to further elaborate on some details and then Tom will make some important operations comments.

William George

Let me just take a minute or two to add a few details that many of you will find useful. The first item that I want to update is our progress and accruals at Atlas. We feel that Atlas is on track with its recovery plan. For the quarter, Atlas operations lost approximately $1.3 million with those losses arising from the ongoing close out of our operations in Florida.

The continuing portion of Atlas was profitable but as expected it is smaller with a back log of approximately $52 million which is $40 million less than 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 third quarter, that overall accrual stood at $3.2 million and the new team at Atlas has resolved approximately two-thirds of those projects, including all of the projects in the mid Atlantic and California markets.

To date the outcomes on complete projects were within expected parameters with the exception of an additional receivable accrual of approximately $500,000 on a job where the owner has recently entered into bankruptcy. It remains our best judgment that these accruals are sufficient in light of the remaining risks even though we expect to vigorously contest many of these matters.

Positive free cash flow was a remarkable $17.7 million this quarter which is $3.6 million higher than the third quarter last year. For nine months, we have had $36.8 million of free cash flow which is twice our total free cash flow at this time last year. Cash balances remain strong at $102 million and we have another $10 million in near cash assets and these totals are in spite of our continued expenditures on acquisitions, our dividends and our regular stock repurchases.

Our effective tax rate for the quarter was about 1% lower than our ongoing full year estimate due to some discrete items. However, because of rounding, the change did not actually affect our quarter EPS number. We continue to expect the full year tax rate to be between 38% and 40%.

Our balance sheet remains rock solid. We have strong cash balances and nominal debt and our unused credit lines are prudently structured and do not expire until 2012. As we survey our markets, we have intensified our efforts to maintain disciplined cost structures and to act proactively to adjust rapidly and efficiently to changes in our individual markets.

Nevertheless, where prudent, we continue to deploy our balance sheet strength into our operations; for example, by investing in modern or improved physical plant and technological resources.

Our stock repurchase program has continued to return money to our shareholders. So far in 2008, we purchased $1.6 million of our outstanding shares and returned $19.5 in cash to our shareholders through this program. Since we began buying shares about a year and a half ago, we've purchased $2.5 million in shares and returned over $30 million to our shareholders.

It's quite an interesting morning. I do not know where our stock price is at the moment, but a short while ago; our market cap was in the $285 million to $300 million range. After subtracting cash and near cash, that means our underlying enterprise is being valued at about $180 million into $190 million and that's an amount that's about two times our trailing 12 month EBITDA. It's also about two times our trailing 12 months free cash flow.

We do not know what the future holds. However, Comfort Systems is a remarkable solid company that is growing in fundamental long term value and we're convinced that our stock buy back is a source of solid value for our shareholders. Our reputation and balance sheet will make a big difference for us as we confront the coming quarters and we're certainly optimistic that we will be able to continue to make good investments, including as I said, our own stock.

That being said, it's the quality and commitment of our work force that is the real key to the confidence that everybody here feels. That's all I have on financials, so I'll introduce Tom, our Chief Operating Officer.

Thomas Tanner

We are certainly to have achieved the best third quarter results in our history. We would certainly like to thank each team member for the great job they're doing. Their hard work, dedication and commitment will always be the foundation for our ongoing success. Even as we move into potentially very difficult economic conditions, we are confident of our future long term success because of the quality of our team members.

As in the first half of this year the great majority of our companies performed very well this quarter. Our continuing focus on improved execution in both our construction and service divisions continues to be a large part of the improvement in our operating results.

Bill previously reviewed the status of Atlas. The two large legacy projects in the Tempe suffered cost overruns this quarter primarily because of decreased labor productivity and rework as the projects are coming to an end, and the employees come to realize that they will be out of a job. However, the loss for this quarter should not overshadow the significant improvement in the remaining operations based in Texas, and the Northern Virginia/ Washington, DC area. Both operations have been profitable all year and both divisions are poised to have positive 2009 results.

To further reduce our risk going forward the Atlas Northern Virginia/Washing, DC group is being merged into House Mechanical, our very strong mid Atlantic based construction operation. The Atlas group brings to us a much improved operations team and a very solid backlog for 2009. House will provide additional support in the areas of estimating, labor management, purchasing and pre-fabrication.

The combined group will be able to reduce their overall overhead costs which is especially important in the current economic environment. Our current view is that Atlas will be moderately profitable in the fourth quarter and then the remaining Texas group expected to have revenue in the $25 million to $30 million range in 2009, will be solidly profitable next year.

As we move into these very uncertain times, our operations will continue to focus and emphasize the basic foundations of our business which includes project selection, estimating, project pricing and project execution. By reinforcing these disciplines, we will be able to maintain our current momentum properly move through whatever the future holds.

Even in a down turn we will invest in our people and our facilities where required to continue to improve our operations and be better prepared for the current conditions and be ready to take advantage of the opportunities that will present themselves when the economy begins to improve.

Our continuing focus on the service and the energy service segments of our business will certainly help us to maintain our profitability in the down turn. We will be helped by lower commodity prices and significantly lower price of gasoline, assuming prices stay in their current range.

At both the corporate level and at our operating company level, we have already started to cut many of our discretionary costs for the balance of 2008 and for all of 2009. Our extremely experienced management teams have made the necessary cost reductions in past down turns and they will continue to use that expertise to effectively manage their operations in the current down turn.

We will be extremely diligent about cutting costs where identified. Many of those cost cuts will become apparent as corporate and our operating companies complete the budgeting process for 2009. But even as we recognize that the future will be challenging, the majority of our companies have a very strong back log.

We continue to book new work and there are still good project opportunities that we are pursuing in the great majority of our markets. Our back log is up sequentially to a near record of $805 million. Our balance sheet is extremely strong. In difficult economic times our strengths will definitely help differentiate Comfort Systems from our competitors.

These strengths will continue to help us attract the best people in our industry to secure work that our weaker competitors can't perform and to have acquisition opportunities for companies which are fundamentally sound but which are struggling because of the current economy. While acknowledging that the economy is certainly weakening, we are confident of our future.

Our operating companies have the best management teams in our industry that are extremely capable of successfully managing their companies through the downturn. Then, our companies will be even better prepared to take advantage of the next upturn.

In closing, I again want to thank all of our key members for the great job they are doing. Because of their efforts, we have earned respectively record results for each of the first three quarters of 2008 and we expect a strong finish in the fourth quarter.

With that I will turn it back to Bill.

William Murdy

We can open it for questions at this point.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jack Atkins – Stephens Inc.

Jack Atkins – Stephens Inc.

Can you comment on how the sub credit environment has impacted activities so far?

William Murdy

We don't have perfect knowledge of this. We have seen and heard about certain projects being delayed and or cancelled based on financing. I think we've had one project cancelled and we've already accounted for that in backlog. We're not seeing it across the board, but where you're going to see it is in some places where we are not located. South Florida, Southern California, possibly Phoenix and certainly Vegas, and we don't have any presence in construction outside of schools in Vegas.

We're just not seeing it broadly yet. We hear more about it. We read about it. We hear the rumors, we listen to the bobbling heads on CNBC, but we don't have true evidence. There are all kinds of stories where one major developer in Houston has just decided not to go forward with a high rise condo here in the west Houston area, but we're not sure if that's financing or market conditions.

Jack Atkins – Stephens Inc.

You said you had one project from your back log that was cancelled, do you feel confident about the remaining projects you have? Have you taken a look at it as far as the other projects that may be at risk?

William George

Given the current times, we are very diligent about what we put into our back log so we have certainly looked at our back log, especially at the end of the quarter to see where it stands. We're comfortable that what's in the back log today will move forward, but by the same token, there's no basis for saying that some projects unexpectedly won't get cancelled. We believe that's going to happen.

We don't think that in our existing back log of $800 million there's a lot of opportunities for that, but we would be foolish not to think that there would be some minor cancellations going forward.

Jack Atkins – Stephens Inc.

Can you talk a little bit about what size of projects are still showing good growth prospects and what type are seeing some deterioration of activity?

William Murdy

We are seeing continuing activity and strength in the health care sector, in schools and a lot of military work, post, camp and station work going forward. There is a lot of high rise opportunity out there. It's shifted from condo to for rent apartments. We don't have a very good view into the hotel sector right now. I think there may be weakness out there, but we don't have a huge presence in that area.

Thomas Tanner

Certainly office building which we don't a huge presence in, and if there's a market where we would be concerned about projects cancellations or significant delays, they would be in the high rise, multi-family business that Bill mentioned, and that's typically a function of financing and true demand.

But that's one of the reasons we've been deliberately reduced our back log. At Atlas over $40 million to a very solid $60 million going forward which we're comfortable with the opportunities that we have there that that back log is a solid back log.

Jack Atkins – Stephens Inc.

You said your Atlas back log was $62 million. Does that incorporate all your multi-family work in back log and could you tell us how much of your back log is multi-family work?

William George

The $62 million at Atlas is all multi-family, increasing for rent. We have a very modest amounts at this point in additional multi-family in our other organizations; I think less than half of what you see at Atlas. The last time we had a round of financial calls, and I will say a lot of that work is very long in the tube.

Your have to remember when you're talking about our back log, 85% of it is work that's left to complete on projects that are already started. So there's still back log for things, there's still close out projects in Florida at Atlas that still represent a little bit in our back log. The back log statistic is a very important statistic because it's the only forward-looking statistic we give.

But it really is not a prospect list. An awful lot of it is work in progress and what's not there, something has to have been signed. So that's not to say it can't cancel, but it's not necessarily what you think of in a lot of industries when you were scratching your head about back log.

Jack Atkins – Stephens Inc.

Could you talk a little bit about the type of margins you're seeing as far as the new projects that you're booking for back log? Are they similar to the ones that are in there now, or better or worse?

William Murdy

We haven't seen it broadly yet. In certain sub markets that are more competitive, more people bidding for the same amount of work, one of the responses to this in our system is that the average project size that we're doing is going down. We have almost 4,800 projects and that's up 300 to 500 from where we've been over the last quarter end.

Consequently the average project size is coming down a little and that's one of the strengths of Comfort Systems, is our breadth of our operations across an awful lot of markets and the ability to do these smaller and moderate size projects.

Operator

Your next question comes from Richard Wesolowski – Sidoti & Company.

Richard Wesolowski – Sidoti & Company

Can you review why you would expect the operating margins, looking broadly not just '09, but during the down cycle to stay above that low average posted during the prior down turn earlier this decade, perhaps separating the market factors that are different from the last time around and also company specific factors.

William Murdy

We are a much stronger, much more productive organization across the board at this point. The work we have done in changing, improving processes and procedures and the controls and training etc., I think are strengths that reside now in the company across the board, and I think we can fully utilize those.

Are there going to be pressures on margins? Yes. And there's also another positive thing here and that the commodity prices have decreased. We buy a lot of gasoline. We buy a lot of steel pipe, copper, PVC. While those commodity materials are not a huge percentage of our operating costs, they're significant and we've seen some positives there.

Are those things positive enough on their own to keep the volume of commercial work at the high levels of the past? We don't know for sure and probably not. But I think we go into this much stronger, not to make short of the fact that we have a much stronger balance sheet than we did going into the '02, '03 period. So I think those are the company specific things.

William George

This mathematical changes, there were companies during that time period contributing what would be extraordinary losses. Remember we had just bought 110 companies in about 30 months and the world had moved pretty significantly around us, and we were in a survival mode.

During that time period, we went from 110 P&L's to about 40 of those P&L's that are left today, and quite frankly we lost a lot of money at Stanford, in Iowa, in Georgia, in the Carolina's. We were losing money, closing things down and adjusting things, and some of that is not reflected in our numbers because the operations were ultimately discontinued.

But some of the best operations we have today are still a part of Comfort Systems, continued in some way so that those numbers haven't been taken out of our historical results. We're not a survival risk right now. We think our operations are the best in the industry, the best this industry has ever seen as opposed to then when we were really struggling to get our feet under us.

Richard Wesolowski – Sidoti & Company

Given all that, are you willing to venture a range of what you would consider a respectable operating margin in a recessionary environment? It sounds like the lows are higher than they used to be and I'm just trying to get a sense of the risk to operating margin over the next couple of years.

William George

I don't think we are going to give you a range, but let me just give you a fact. The fact is that the way we've structure our President's incentive plan for the 45 people who run our existing and our newly acquired companies, they don't get a penny of bonus unless at the operating level they make 4%. Let me tell something, they plan to do well. They plan to continue to make money.

If you looked back historically at those terrible times when we had these calls, we would talk about geographies that were struggling, but we also had many, many geographies that did well. Many of the geographies that did well were smaller markets such as Little Rock, Arkansas or Grand Rapids, Michigan or even smaller cities that they don't necessarily in my opinion see the same highs and lows that you might see in giant metropolises.

If you look at our year over year decline in back log, if you take out our three largest project companies, two of which are in two of the largest cities we operate in, if you back those out, we're actually up. So the loss is more than accounted for at three of our largest project companies.

I think what you're going to see is a mixed bag. You're going to see different people struggle, different people do well, but I think this is a good company, and good companies make money in down turns.

Richard Wesolowski – Sidoti & Company

Just trying to understand the Atlas claim back log and how you recognized a loss on those four projects and still had contingency left. Is the contingency a sign of specific projects and it's not an aggregate number?

William George

That's exactly right. There were 11 main projects that had to be closed out in those three geographies. Each one had a discrete accrual which had a discrete set of factual assumptions and explanations that we went over with our external accountants, and each one of them is treated separately.

Whenever we closed out those projects, frankly the majority of the ones we closed out had modest pick up, but those pick ups have tended to be for one reason or another reallocated to the remaining projects, but at the end of the day, it's a very granular conversation.

Richard Wesolowski – Sidoti & Company

So just because you recognized this loss, it doesn't mean another project won't come back to help you in a quarter or two from now.

William George

We plan to contest these matters vigorously and there's some of that money we really believe we're owed.

Operator

Your next question comes from David Yuschuk – Sanders, Morris Harris.

David Yuschuk – Sanders, Morris Harris

You are talking about a company that has a lot of potential here even in a difficult environment yet enterprise value on the shares suggest that you're getting closer to liquidation value than you are sustaining. As you looked at and as you talked about the acquisition opportunities, based just off of our forecast alone, the value of the company today on an enterprise base, 2.5 times enterprise at EBITDA. Acquisitions versus share buy back; it would seem to me right now given the reluctance on the owners to sell to be a major share buy back opportunity more than it is looking at acquisitions. Give me a sense of either/or or both.

William Murdy

We agreed that the share buy back opportunity is quite attractive on a mathematical basis. The market is acting entirely irrational. There is an undue lack of exuberance and the share price doesn't stay where it is I don't think. We're very careful about acquisitions. Acquisitions for us are not just opportunities to go out and create earnings, but not just that.

We're making strategic acquisitions. We're making acquisitions in areas where we are not currently located but demonstrate future growth, future vitality, where we can be a major non union player. So there's a lot of strategic aspects to that. At the same time, we're not going to overpay for strategic activities.

We have a penchant for current accredited value. And we can turn on and off our acquisition activity easily as we can our stock buy back, and we've consistently demonstrated that we're interested in buying back stock.

David Yuschuk – Sanders, Morris Harris

Given the two and a half, three times enterprise is at EBITDA right now, does that present a dilemma as far as going into '09 and talking price with them?

William George

If we were to stay at these kind of multiples, it would be very, very hard mathematical to make an argument for doing anything but buying our stock. One thing, our stock buy back program utilizes a matrix where when the stock dips, we go get shares. We get a share of what the market is trading.

But if you look over time at our stock floats and our weighted average prices, it's not as if you can go buy millions of shares at the low end of the range. You just have to be in the market every day with a rational program to make sure that you get a share. That said, if we were to see a prolonged period of trading at a couple times enterprise value of EBITDA I think we would be quite a handsome amount of stock.

One indicator of that is the fact that we bought half a million shares since the last time we all talked. Our matrix, because we've traded slowly over that period of time, we've traded lower and lower, our matrix has continued to get more and more shares. Most of those shares in the last two or three weeks when the stock got really low, so I think you do what you can in that area.

You measure what you do but you make sure that if you have this kind of a value, and you really believe in the company and you have as much cash as we have, it's pretty hard not to engage in that activity.

David Yuschuk – Sanders, Morris Harris

Let's just talk about the quality of the receivables at this point in time. Any issues there as far as needing to take some additional charges? How well have you scrubbed those?

William George

In a word, no. We don't think we have to take much in the way of additional charges. Keep in mind that for all of our project work, we get liens on the property and since there's still the land value and everything involved. So far the land values of properties have fallen so low that people are abandoning them.

We tend to collect all of our money on construction work. We do have some circumstances from time to time where there will be structural issues. In fact in this quarter, people who are looking closely will note that we have increased our bad debt reserves. A good chunk of that increase is simply we believed it was prudent to increase those reserves for our service operations where we don't get those liens, particularly for the 15% or so of our revenue that's pure call out service.

But at the end of the day, one of the nice things about this industry is you get a lien on everything that you do that comes ahead of everybody but the IRS. That's very helpful for us.

David Yuschuk – Sanders, Morris Harris

As far as you review your operations today and looking at the various markets is there anything in your markets right now that stands out as far as whether it's you or somebody else in that market place starting to see some substantial signs of black hole that seems to be out there that everybody seems to be talking about and expecting. Is there any market there that shows any indication that that's beginning to surface?

William Murdy

I certainly wouldn't characterize it as a black hole. I think the areas of the country that have been particularly frothy, San Diego, Las Vegas, Phoenix, Miami, two markets that we're not in in that list, certainly would be candidates for that. On the other hand, the world is not coming to an end. I think there are some temporal dislocations in front of us in certain markets, but I don't think so.

This is not a melt down for us specifically and anyone in general. This comes back. I think what's happening now is just fear of the unknown. That's just as irrational as the other kind of positive exuberance that might have existed in the telcom/datacom boom in the early century.

David Yuschuk – Sanders, Morris Harris

From an operations point of view, is there anybody in your operations, because you're showing some darn good numbers, excellent gross margins. Is there any of the operations right now that's beginning to show that kind of drag that could suggest that there could be some problems in some segments of your markets?

William Murdy

Not on a historical basis. We haven't seen that yet.

William George

Certainly not the kind of stuff you seem to be referring to. We mentioned on the last call that we were seeing comparative weakness in Arizona, in California, in the upper mid west in one or two locations. I think we mentioned Seattle. Certainly that continues. But as far as the science fiction theme of a black hole scenario, I would say that the fear there is, a year from now, two years from now, will bank be lending to good projects.

We feel pretty good about that in part because 35 of our 40 traditional markets are these smaller markets where the lending has usually been done by the local regional banks and they tend to hold the debt so they have a mixture of mortgages that are two years, five years, ten years and 20 years into their amortization cycles. But at the end of the day, if financing stays shut down long enough, things start to get much more extreme. I guess that's the only think I can think of that might be responsive to what you're describing.

David Yuschuk – Sanders, Morris Harris

So a longer term may be requirements on some of the owners to just put more equity in the deal than has traditionally been the case on these regional markets.

William George

Usually going into a down turn we're over built. In this case, if you look at vacancy rates in office buildings or lodging occupancy, they don't look bad compared to10 year averages. Normally, and it was certainly true in '01, it was definitely true in '91 and unbelievably true at the end of the '70's when we had the massive melt downs in our industry, it's true in this case, but those underlying statistics don't look bad. So at some point good projects will start to get built.

Operator

Your next question comes from Clint Fendley – Davenport.

Clint Fendley – Davenport

Tom talked a bit about the discretionary costs that you've begun to cut here. I wonder if you could maybe discuss the levers that you might be able to pull both on a fixed as well as on a variable basis as we go through 2009.

William George

The biggest variable level and it's massive in our company and on a scale of our results is incentive income. In this industry, we pay very, very well in an expansionary time. Our $10 million bonuses to the field is just to the high level people. Those naturally go down and they go down quite substantially because there are growth incentives within our plans.

That's the biggest area that will ratchet back naturally. You get past that and what you have to do is you have to look at what you're doing on your general and administrative side. You have to make sure that you're getting maximum productivity that you have the right number of people, that you keep the right people and then on the operational side, nobody shows up, the vast majority of our work force doesn't show up at Comfort Systems USA addresses every day.

The show up at job sites, and when jobs end, it's not as if we bring 1,000 people into a 30,000 square foot building and have them stand around. That's just not a feature of the construction industry.

William Murdy

There are things that can be done at the margin if you will. All of them have costs. All of them have benefits. I don't think we're doing anything today that we don't think has some benefit. We safe side ourselves. We have already decided to do certain cuts; certain SG&A direct cuts. We're going to mitigate the amount of training and education we do next year relying on the fact we've done a lot to date, and we've got a lot of people trained. We've got momentum in the system.

We're going to be cancelling a number of our national meetings which again have efficacy, have benefit, but we believe we can operate on the momentum of meetings past. We're freezing senior management base pay for next year. All of this is safe siding. We can always adjust those back up as necessary or useful.

We're mindful of all these things and I think being very prudent. And, I think in each of our individual operations, they are as well. At the end of the day, we are in a lot of project work where those work forces are variable.

Clint Fendley – Davenport

When you look back to the previous down turn are you entering the end of this cycle with a much bigger back log than you had at that time?

William George

It's remarkable. In fact, close to half of our companies today still have record back log, and people who have followed us, they will recall when $300 million was a huge number for us to be reporting in back log. Then we were two-thirds the size we are now or more, so it's not as if there is a differential there. But it really is a different starting point.

Clint Fendley – Davenport

When I look at the cash flow statement, there was a bit of a spike there, a notable one within the bad debt expense. Is that related to the Atlas work?

Thomas Tanner

No, mainly that's related to putting aside more money.

William George

It was much more money than indicated by numbers, but frankly what we thought was prudent on the service work just because we had a great quarter and that seemed like a prudent thing to do. Also, there was one project where there's a very complicated ownership structure. It's in Florida and there is a bankruptcy, and although we believe our liens are good, we thought it was prudent to classify some contingency that we had set aside in that job for those issues as bad debt.

Bad debt runs through SG&A as well, so you would have seen SG&A improvement this quarter but for the incremental additions to bad debt.

Clint Fendley – Davenport

It was about $1.6 million if I'm not mistaken on the cash flow, is that correct?

William George

I don't that the incremental amount, the accrual amount is bigger than that, I think the incremental amount is less than that. If I get better information before the end of the call, I'll come back to that.

Operator

Your next question comes from Tahira Afzel – KeyBanc Capital Markets.

Tahira Afzel – KeyBanc Capital Markets

In terms of your cost structure, as you look at your personnel, your benefits and your G&A structure on the institution side of your business, health care, education and government, you see seem to be holding up pretty well, and you compare that of the more private commercial and multi-family oriented cost structures, are there any differences between the two?

William George

We use a lot of the same resources to do either type of work and we don't manage the work or segment from an operational viewpoint by customer type. The majority of our companies to that kind of work and they also do commercial work, and they are really using the same back office for both.

Tahira Afzel – KeyBanc Capital Markets

As I look back towards 2001, and I know those were abnormal circumstances for you and the company has materially changed since then, but even I look back then you were materially able to get your G&A down even on a year on year basis, you were able to trim it by around $20 million plus year over year. If you look into 2009 and if you have to push and pull what kind of trimming could you potentially get it down to if you flat to 5% decline in revenues? Is there any sensitivity around that?

William George

Some of that $20 million reduction related to companies actually being closed and the entire staff being laid off. I certainly don't foresee that happening anywhere, so I certainly wouldn't be willing to commit to a $20 million number. That said, we'll get a third of the way towards that. If things get really slow, we'll get more than a third of the way towards that just on the natural decrease in incentive compensation.

We think that would entail a great decrease in revenues and obviously that would change the overhead needed related to that. We're also very actively, over a long period of time if you look at our company and see what happens with the number of P&L's, you'll see that even though at any given time there's not a very perceptible difference.

Over a period of time, we're making a lot of progress in combining operations, standardizing things and trying to economies of scale that way.

Tahira Afzel – KeyBanc Capital Markets

I know that most of the CapEx comes from state and local, is budgeting differently and hence do you see any sensitivity to what you're hearing right now through some of the pipelines that you're seeing?

William Murdy

If you're talking about schools as part of that, it's holding up well. Education today is 17% of our revenues are coming from that sector. It's holding up quite well. I think there is the recognition that if we intend to improve our education system, it's got to start with the capital that's invested in the buildings and facilities and that continues.

Tahira Afzel – KeyBanc Capital Markets

As both of you look carefully at the elections coming up, and who knows which way it will go but if Obama comes in, he's been talking a lot about energy efficiency and the school stimulus associated with infrastructure. As you look back in your experience, if you do that there is a stimulus coming in, do you think it will play out with a concerted lag and will there be an air pocket something beneficial coming your way and weakness in the economy that you're seeing in the economy right now?

William Murdy

With respect, I think both the candidates are talking about energy efficiency and all kinds of programs that relate to that that's longer term in nature. But we have already started in the energy efficiency area and its going to stand us in good stead going forward in spite of the slight current tip in crude oil prices which does have an effect on overall energy prices.

Our customers' end users are quite interested in energy efficiency and when they look at their facility and 40% of the electrical power consumption is based on their HVAC system, they see ways to save substantially by having those HVAC systems well designed and well serviced and maintained.

So we're already started there. I think this is something that happens almost regardless of the administration. There maybe some boost by virtue of an Obama administration if there is one, but I don't think that would be significantly different to us.

Tahira Afzel – KeyBanc Capital Markets

As you look at your company, and as you pointed out the evaluations is exceptionally compelling, let's assume that private equity for example does have the cash to look in the space, companies with profiles similar to yours, what would be the challenges doing an LBO type of transaction.

William George

The main challenge would be the need for bonding. You would have to have a pretty special private equity interest that would be willing to put in the kind of cash they would have to put in to result in a balance sheet that was not very levered. You might lever up one or two times enterprise value in EBITDA.

You could go to a three times, but you better be thinking about troughing but not peaky, but not when you're doing that. That leaves those companies putting in so much cash that they have to make heroic assumptions about the future in order to get the kind of rates of return that they would typically get.

That said, I would have said never before our stock price got to this level. This is an amazing set of valuations. And it's not just Comfort Systems.

William Murdy

That's not to say we would even entertain an equity offer at anything near these levels in our stock. Maybe there's some Board members on our call. We wouldn't even take it to the Board.

William George

There might be interest but it would be one sided.

Tahira Afzel – KeyBanc Capital Markets

Would you say that there's more likelihood in the electrical/mechanical contractor space more like you heard of M&A consolidation as we saw to a great extent in the last cycle versus LBO type of transaction?

William George

Certainly it's a possibility. It's happened before. Remember this is a highly fragmented and principally private area, and we believe on the other side of that there are lots of opportunities for expansion by bringing in some very good currently private enterprises into Comfort Systems.

Operator

Your next question comes from Tristan Richardson – Dave Davinson.

Tristan Richardson – Dave Davinson

On your prospect and the list of projects that you target, how far out do you typically look? Are you looking at projects that are going to come out 12 months from now or nine months? How far out do you see?

William Murdy

We typically to get any visibility we would be talking to local engineers and architects in our respective market places to see how busy they are and what's on their drawing boards that they're working on.

William George

In today's environment those are the places we're looking, and in some markets we're seeing work diminish and in other markets we're seeing the engineers and architects are still very busy. So it is a mixed bag across the country.

Nothing more than 12 months. A typical project that we're doing can get designed in six to nine months, so we don't get great visibility beyond that.

Tristan Richardson – Dave Davinson

On the whole, would you say that that hasn't changed if you were to look at your targeted list a year ago?

William Murdy

I would say that in some markets that Bill mentioned, Phoenix, San Diego, we're seeing less opportunities. In other markets we look at this information weekly, in conversations with company presidents and our regional vice presidents. It's still amazing the opportunities that are out there. The estimating staffs are still very, very busy in the great majority of our companies.

Operator

Your next question comes from Jack Atkins – Stephens Inc..

Jack Atkins – Stephens Inc.

How much of the sequential decrease in same store back log was due to the working off of Atlas back log?

William George

Year over year it was $40 million.

Jack Atkins – Stephens Inc.

On a sequential basis?

William George

It was $14 million quarter over quarter.

Operator

There are no further questions. I would like to turn the call back over to management.

William Murdy

Thank you very much everyone for being on the call. We hope we have projected a reasonable amount of optimism, certainly optimism relating to our capability to deal with the uncertainty of the future here.

We thank you all and we'll see you in three months on this call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!